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Spotlight on Regulatory Compliance

Financial regulation is constantly evolving with ever more byzantine, copious and intrusive rules, whose reach is ever-widening. This environment, alongside the competitive nature of the globalised economy and the current focus on emerging forms of trading and financing in the “shadow” economy, creates a difficult and complex world for financial services firms and transactions.

Typical regulatory issues for corporate deals

Below are a few examples of areas where early-stage regulatory input is key to an effective corporate deal:

Financial promotion: The “financial promotion” regime is wide-reaching and is difficult to escape where corporate deals are concerned – not least because it captures most communications regarding transactions in shares.  Various exemptions are available for corporate practice, but many have detailed conditions attached with generally complex rules. Making an unlawful financial promotion is a criminal offence, which makes it important to get appropriate legal advice before communicating with other parties on a potential deal – even on an informal basis.

Change in control: Negotiating the change in control regime successfully can be one of the most substantial issues for any transaction involving a regulated financial firm. It should also be one of the first issues to consider, in view of the timing implications. The principal requirement is that any transaction involving an acquisition, disposal or increase of holdings in such a firm, which is above a 10 per cent. threshold (and/or amounts to “significant influence”), may require prior approval from the FCA/PRA. This process can take 6-12 months and requires disclosure of detailed and sensitive information with respect to the potential “controller(s)”.

The filing process can often cover a number of group companies; for more complex structures (including PE funds, offshore structures and joint ventures) the first step of determining the scope of the “control” chain can in itself be a very involved exercise.   The complexity and duration of the process and the potential criminal consequences for breach therefore make it critical to factor this into transaction arrangements from the outset. Changes are currently being considered at EU level to the EU rules and guidance on which the UK regime is based. This has the potential to result in changes to the UK rules, including stricter and/or more widely applicable regulatory approval requirements in some circumstances.

AIFM Directive portfolio company rules

The Alternative Investment Fund Managers Directive took effect in July 2013.  It regulates the management and marketing of alternative investment funds and, for private equity funds, also imposes regulatory disclosure and anti-asset stripping rules in relation to the acquisition of EU companies – essentially restricting firms that acquire control of European non-listed companies or issuers from facilitating, supporting or instructing any distribution, capital reduction, share redemption and/or acquisition of own shares by the acquired company within the first 24 months following acquisition. It is essential to consider these rules properly at the outset of any private equity acquisition, given their potential financial and commercial impact.

In light of some of the increasingly complex regulatory hurdles that need to be cleared before a transaction can be completed and the long lead times that these can entail, it is important to consider whether there are any regulatory implications early on in a proposed transaction.

Richard is a partner in our Regulatory Compliance practice in London, Specialising in non-contentions financial services regulation.  He advises banks, asset managers and other financial institutions on a wide range of financial regulatory and compliance matters.

• Richard Small, Partner, London, UK| richard.small[at] | +44 (0) 20 7809-2424

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