No M&A without FSA

Growth is always at the forefront of a business strategy and, even with the looming FSA regime, boadrooms are discussing alliances, acquisitions, mergers and refocusing the direction of a business.

But as deals take shape and agreements are being reached, some firms are failing to complete their necessary disclosures to the FSA.

Past experience has shown that there is often a knowledge gap when a sector undergoes such a quantum reorganisation. And a key part of the FSA regime is the timely submission of information.

Whether buying or selling, firms should always initially consider the disclosure requirements of what in FSA 'speak' is a change of control.

Voting shares

In the FSA's eyes a controller is defined as someone who owns or exercises more than a set percentage of the voting shares of a company.

The controller can also be the owner of a business or a partner in a partnership exercising in excess of a fixed percentage of control. For insurance intermediaries the limit is set at 20%, but for IFAs, banks and insurers it is 10%.

Under the rules, a UK broker must notify the FSA of certain events concerning the firm, such as reallocation of voting shares (see box).

Using these criteria, you can quickly identify whether the proposed deal is likely to be of interest to the FSA.

Some of the language used may suggest that the deal must have reached a fairly advanced stage of completion before such disclosure is necessary.

This is not the case.

Guidance in the supervision manual clearly suggests that if a firm is to be considered to be compliant with principle 11 - that it deals with the regulator in an open and co-operative manner - then these discussions should commence at the earliest opportunity, if such a change is envisaged.

Buyers must be aware of the need for sellers to make the disclosure early, and should of course be prepared to manage the impact such disclosure has on its own compliance.

Some firms who have received either 'minded to authorise' notifications or even final 'scope of permission' letters may have overlooked the specific reference to the need to disclose such activity to the FSA.

But they do so at their peril.

Firms that are selling their businesses, will face questions focused on how they intend to discharge their responsibilities to consumers and clients alike, with even further more detailed questions if the reasons behind the sale relate to either cash flow or capital concerns. Buyers on the other hand, can be asked to confirm just how they intend to integrate or manage the integration of the acquisitions into the business.

Solvency, systems, management and finances may be the principal focus of the detailed questioning, but equally tested are the updating of business plans, and overall compliance management.

Firms which only disclose the final deal may find that the FSA wishes to add its own requests to ensure that the clients are fully protected in any business transfer.

Defer completion

In some cases, if the FSA is already concerned about the compliance of one or both firms in the deal, it may require firms to actually change or defer the actual completion until it is satisfied with the answers provided.

These measures are likely to apply only to major business mergers, and may seem extreme. But smaller business mergers can also come under the gaze of the regulator if they acquire a business without either completing any compliance due-diligence, or without planning the subsequent integration in sufficient detail.

While compliance with FSA requirements may not be required before 15 January 2005, all firms selling insurance should be well on the way to completion of their preparations. Buying the business of firms who have not yet received their permissions notice, or who have simply decided to consolidate, will make no difference to the ongoing need to operate in a compliant manner. But beware, as the FSA is unlikely to simply make allowances for a new management team, on 15 January, unless they already know that firms have fallen short.

While this may be more common in the run-up to regulation, post January this will add a new dimension to just how far discussions should have progressed and just what you should be telling the FSA, whether you are an acquirer or seller.

Managing your disclosure at an early stage may help deal with any apparent conflicts that may develop.

For many firms, which is likely to be the vast majority of insurance intermediary firms, who will not have a dedicated supervisor, disclosure may simply be a telephone call to the central inquiries team, followed by a short letter confirming the disclosure.

So buyers and sellers beware. There will be work needed to update any information you have supplied to the FSA, so don't forget to factor it in.

The FSA must be told when:

- A person acquires control of a firm

- The percentage of shares held in the firm decreases from 20% or more to less than 20%

- The percentage of shares held in a parent undertaking of the firm decreases from 20% or more to less than 20%

- The percentage of voting power which an existing controller is entitled to exercise, or control the exercise of, in the firm decreases from 20% or more to less than 20%

- The percentage of voting power which the existing controller is entitled to exercise, or control the exercise of, in a parent undertaking of the firm decreases from 20% or more to less than 20%

- An existing controller becomes or ceases to be a parent undertaking.