The introduction of the new financial regulations in the UK in April 2013 has had a meaningful impact on the process for getting approvals for the acquisition of regulated firms. The process is now more time-consuming and less predictable. Anticipating the regulators’ concerns together with early and constructive engagement has become vital to minimise the risk of delay or even of failing to obtain approval at all. In this newsletter we discuss how the new regime is working in practice, focusing in particular on how it affects insurers.

1.
Newsletter
Insurance and reinsurance news ­ January 2014
Changes of control of firms under the UK’s new regulatory regime
24 January 2014
The introduction of the new financial regulations in the UK in April 2013 has had a
meaningful impact on the process for getting approvals for the acquisition of regulated
firms. The process is now more time­consuming and less predictable. Anticipating the
regulators’ concerns together with early and constructive engagement has become vital
to minimise the risk of delay or even of failing to obtain approval at all. In this
newsletter we discuss how the new regime is working in practice, focusing in particular
on how it affects insurers.
George
Swan
James
Smethurst
Romin
Dabir
Introduction
The Financial Services Act 2012 amended the Financial Services and
Markets Act 2000 (FSMA). It introduced so­called ‘twin peaks’’ regulation to
the UK through the creation of the Prudential Regulation Authority (PRA) and
the Financial Conduct Authority (FCA). In broad terms the PRA is responsible
for the prudential regulation of banks, insurers and a small number of very
significant investment firms. The FCA is responsible for conduct regulation of
all regulated firms, as well as for the prudential regulation of firms not covered
by the PRA.
Impact of Financial Services Act 2012 on change of control
regime:
The new UK regulatory regime has changed the way the rules which underpin
the change in control regime are applied. Those rules are derived from the
Acquisitions Directive (2007/44/EC), which was intended to create a
harmonised regime throughout the EEA.
Any application for approval of a change of control of a bank or insurer must
now be sent to the PRA. The assessment of the application will be led by the
target’s supervisory team at the PRA, rather than by a separate team in a
change­of­control department.

2. Section 187A FSMA imposes an obligation on the PRA to consult with the
FCA. So they work side by side in considering change of control applications.
The FCA may consider that there are reasonable grounds to object to the
proposed acquisition. In that event it may direct the PRA either to object to
the acquisition, or not to approve the acquisition, unless it does so subject to
certain specified conditions.
Given that each regulator now has an interest in policyholder protection, one
might think that the scope for disagreement would be minimal. The PRA has
been given a specific insurance objective, set out in section 2C of FSMA.
This is ‘contributing to the securing of an appropriate degree of protection for
those who are or may become policyholders.’ The FCA has a ‘strategic’
objective of ‘ensuring that the relevant markets function well’ (section 1B
FSMA). It also has a consumer protection ‘operational’ objective. This is
‘securing an appropriate degree of protection for consumers’ (section 1C
FSMA). To a certain extent, therefore, the regulators objectives are aligned.
However, the focus of each regulator has proved to be different.
The PRA set out its approach to insurance supervision in its paper ‘the PRA’s
approach to insurance supervision’ (April 2013) (the PRA Approach
Document). It made clear that it will view policyholder protection through the
prism of safety and soundness:
‘Policyholders are protected both by the PRA as prudential regulator and by
the Financial Conduct Authority (FCA) as conduct regulator. The FCA seeks
to ensure that consumers are treated fairly in their dealings with insurers,
whereas the PRA’s focus is to ensure that policyholders have an appropriate
degree of continuity of cover for the risks they are insured against. Ensuring
continuity of cover requires insurers to be able to meet claims from, and
material obligations to, policyholders as they fall due, which, in the case of
some policies, may emerge after many years…'
There is thus a recognition of the long­term nature of some insurance
liabilities. For life insurers, the PRA is likely to focus on the long­term capital
strength of firms. We have seen evidence of this in a number of applications
in which we have advised.
The FCA’s concentration on fairness concerns may cause some tension in
this regard. This applies particularly when it comes to applications for a
change in control in respect of insurers with a with­profits book.

3. Impact of new regulatory environment on change of
control regime:
RBS’s takeover of ABN Amro and Lloyds TSB’ takeover of HBoS led to
serious systemic problems within the banking sector. These transactions,
together with others lessons of the financial crisis (in particular, the focus on
governance) have informed the regulators’ current approach to change in
control applications. We are seeing an ever closer scrutiny of changes in
control and requests for consent for approved persons connected with
acquisitions than used to be the case.
What this means in practice:
Requirement for pre­meetings and submission of draft forms
It is now commonplace for the PRA to request an initial meeting to discuss
the proposed acquisition, particularly on more complex or significant deals.
The PRA frequently requests submission of the application for approval in
draft form before accepting the formal submission. This was not the practice
of its predecessor, the FSA.
One might expect that to shorten the time required by the regulators to
assess the final submission, but this has not always been our experience.
The statutory clock on the application does not start until the PRA
acknowledges receipt of a complete application. In practice, the submission
of forms in draft can introduce a great deal of uncertainty to the timetable.
This clearly makes negotiation of any sale and purchase agreement
(including any long­stop date for the transaction) and planning for completion
more complicated. The importance of early and thorough preparation has
increased, though this can be difficult where the details of the transaction
(particularly the holding structure and governance) have not been finalised.
Unusual information requests
We have recently seen requests from the regulators for information that has
not previously been required in the change of control context. For example,
both regulators have requested details of due diligence findings on the target.
It is difficult to see how this request can be justified in the context of a
process designed to assess the fitness and propriety of the proposed

4. controller, not the target. The FCA’s approach here raises concerns around
client confidentiality and the legal privilege that may attach to any adviser’s
due diligence report. It would be an unwelcome result if these requests
resulted in less rigorous due diligence being undertaken in future or if the
format for the reporting of due diligence was changed to avoid regulatory
scrutiny. It may be, on the other hand, that some regulatory focus on this
issue, short of requiring privilege to be waived, is justified to ensure that
bidders have focused on the issue.
We have also seen new requests by the regulators for copies of the board
minutes where the proposed transaction was discussed and approved by the
potential acquirer.
There is a possible explanation for these new requests; It is that the regulator
may be looking for evidence that the potential acquirer has taken the decision
to acquire following a proper process of due diligence and subject to sufficient
challenge at the board. There may, however, be alternative, less intrusive
means that the regulator could employ to satisfy itself of this.
Increased focus on future governance of target
The regulators are placing an increased emphasis on good governance. This
is particularly evident from the PRA Approach Document, where there are
multiple references to the importance of that factor. We believe this is likely to
affect the PRA’s assessment of two issues in particular:
(i) the proposed holding structure of the firm; and
(ii) the internal oversight and risk management structures and processes.
The PRA has made clear that it will scrutinise closely holding structures that
are particularly complex and which involve entities located outside the UK:
‘In cases where the most senior legal entity within a group is a holding
company, which is not itself authorised under the United Kingdom’s statutory
regulatory regime, the PRA will expect to have extensive contact with its
board and senior management, and will consider whether it is suitable to
exercise control over a regulated firm. The PRA will expect the holding
company to take responsibility for the group as a whole having due regard to
the PRA’s objectives. And the PRA will consider whether the insurers’

5. membership of a group affects whether the insurer satisfies the Threshold
Conditions, including if the ownership structure compromises the ability of the
insurer to be supervised effectively by the PRA.’
Complex acquisition structures (e.g. multiple intermediate holding companies)
or which involve offshore controllers are likely to be subject to particular
scrutiny with the regulators, focusing on how the UK authorised firm will fit
within the overall governance and control framework.
The PRA has emphasised that the board of the authorised firm should have a
mix and balance of skills, so that collectively it can understand the breadth of
the firm’s business. The PRA will require most, but not all, board members to
have relevant experience of financial services.
This emphasis on competence and experience of the board is likely to
increase following the recent debate regarding the appropriateness of Mr Paul
Flowers’ appointment as non­executive chairman of The Co­operative Bank
plc. Indeed, in the wake of that debate, we have already heard calls from
members of the Treasury Select Committee for reforms to, and a tightening
up of, the approved persons regime still in place for non­banks.
The PRA Approach Document emphasises the importance of independent
directors as a means of ensuring that the executive and management of the
insurer are properly held to account for their decisions. Potential acquirers
should therefore consider carefully whether the proposed board contains the
appropriate balance of executive and independent directors. They should be
prepared to explain in detail any proposed changes to the governance of the
UK authorised firm, including identifying particular individuals whom the
acquirer proposes to appoint as additional or replacement senior
management. Transactions where key members of the UK authorised firm’s
management team will remain with the seller, or are otherwise likely to leave
on completion, will require the acquirer to satisfy the regulators that people
with appropriate experience and competence will either remain or be
appointed at closing.
There will also be an issue as to whether individuals the acquirer proposes to
appoint are appropriately qualified and experienced to undertake the roles for
which they are being put forward. Where individuals will have to be approved
by the regulator, sufficient time should be factored into the transaction

6. timetable to ensure approval can be obtained before closing. The approval
form must be submitted by the authorised firm, which is ultimately responsible
for attesting to the fitness and propriety of the candidate so the acquirer
should be prepared to work with the UK authorised firm to ensure it is
comfortable with the proposed candidate.
Where an individual’s experience for the particular role is a potential issue, an
acquirer should be prepared to consider whether a back­up candidate is
needed. We have seen several recent examples of the PRA pushing back on
proposed corporate structures, either for lack of experience in the use of such
structures, or what it perceives as an unbalanced board as a result of there
being too few independent directors. We believe this is likely to continue to
be an area of contention.
More purposive approach to interpretation of the law
The PRA has repeatedly made clear that it intends to adopt a more ‘judgment
­based’ style of supervision. It will rely less on evidence of strict compliance
with the letter of the rules and more on ensuring that their spirit and purpose
are being adhered to. We have seen some evidence of this in the regulators’
approach to assessing change of control applications (for example, in relation
to the identification of controllers) as noted above. It is likely that this trend
will continue and strengthen.
Potential for last­minute delays and glitches in the process
Assessments of change of control applications are reviewed by the firm’s
supervisory team (PRA) and change in control team (FCA) and then referred
to more senior levels for final approval. The level of approval required
depends on the size and significance of the target firm. Notwithstanding an
extensive review and information gathering exercise at the first stage, the
subsequent senior review can result in further requests for information or
even changes to the deal terms. This could result in delays while any
additional information requested is gathered, or any changes requested by
the relevant regulator to the proposed acquisition are negotiated.
Possible loss of flexibility?
There is a danger that the regulators’ flexibility to consider applications may
be eroded. The European Securities and Markets Authority (ESMA) has

7. recently submitted to the Commission a draft regulation setting out the
information to be provided to a regulator in relation to a proposed change of
control of an investment firm. Once made, the regulation will replace existing
guidelines on the same subject which apply in relation to all changes of
control.
Certain important flexibilities under the guidelines have not been preserved in
the draft regulation. While this is not directly relevant to insurers, given that
the PRA’s constituency includes some major investment firms, insurers too
may find the PRA less willing to dispense with the provision of information
which is either not material or not relevant to the transaction in question.
Comment
The change of control regime for insurers is clearly becoming more
burdensome in practice. This reflects the general approach of the PRA to
achieving its regulatory objectives, its emphasis on ‘judgment­based
supervision’ and the increased complexity of the new regime. The changes
have made it more challenging for firms to plan for acquisitions in the
regulated sector.
A careful strategy aimed at avoiding problems is essential. It should be based
on early engagement with the PRA and FCA and an understanding of their
respective concerns and priorities.
For more information, please contact:
George Swan
T +44 20 7716 4695
E george.swan@freshfields.com
James Smethurst
T +44 20 7832 7478
E james.smethurst@freshfields.com
Romin Dabir
T +44 20 7785 5479
E romin.dabir@freshfields.com