This chapter may apply to directive friendly societies in the circumstances described in SUP 16.4.2 G (1) to (3).1

This chapter may apply to controllers and proposed controllers of directive friendly societies in the circumstances described in SUP 16.4.2G (1) to (3).1

Part XII of the Act (Control over authorised persons) places an obligation on the controllers and proposed controllers of those UK domestic firms not listed in SUP 11.1.1 R (1) to SUP 11.1.1 R (6) to notify the FSA of changes in control. Furthermore, those persons are required to obtain the FSA's approval before becoming a controller or increasing the level of control held (in certain circumstances). SUP 11.3 is intended to assist those persons in complying with their obligations under Part XII of the Act and also sets out the information which a controller or proposed controller must provide to the FSA before becoming a controller or increasing the level of control held.

The rules in SUP 11.4 to SUP 11.6 are aimed at ensuring that the FSA receives information it needs from firms to assist the FSA with its responsibility to monitor and, in some cases, give prior approval to firms' controllers.21

1 Part XII of the Act does not place an obligation on a controller of a UK insurance intermediary to notify the FSA where it becomes or ceases to be a parent undertaking. Nevertheless, the rule in SUP 11.4.2AR (2) requires the UK insurance intermediary to notify the FSA of parent undertakings so that the FSA can monitor the firm's continuing satisfaction of the threshold conditions, which includes consideration of its controllers and parent undertakings (see COND).

As the approval of the FSA is not required under the Act for a new controller of an overseas firm, the notification rules on such firms are less prescriptive than they are for UK domestic firms. Nevertheless, the FSA still needs to monitor such an overseas firm's continuing satisfaction of the threshold conditions, which normally includes consideration of a firm's connection with any person, including its controllers and parent undertakings (see COND). The FSA therefore needs to be notified of controllers and parent undertakings of overseas firms.

As part of the FSA's function of monitoring a firm's continuing satisfaction of the threshold conditions, the FSA needs to consider the impact of any significant change in the circumstances of one or more of its controllers, for example, in their financial standing and, in respect of corporate controllers, in their governing bodies. Consequently, the FSA needs to know if there are any such changes. SUP 11.8 therefore requires a firm to tell the FSA if it becomes aware of particular matters relating to a controller.

Similarly, the FSA needs to monitor a firm's continuing satisfaction of threshold condition 3 (Close links) (see COND 2.32), which requires that a firm's close links are not likely to prevent the FSA's effective supervision of that firm. Accordingly the FSA needs to be notified of any changes in a firm's close links. This requirement is contained in SUP 11.9.2

Every firm, other than a firm listed in SUP 11.1.1 R (1) to SUP 11.1.1 R (6)2or a firm excluded from the operation of SUP 16.4 or SUP 16.5 by SUP 16.1.3 R, is required to submit an annual report on its controllers and close links as set out in SUP 16.4 and SUP 16.5.

The requirements in SUP 11 implement certain provisions relating to changes in control and close links required under the Single Market Directives.2

2An event described in SUP 11.4.2 R (1) to SUP 11.4.2 R (4)[and R (1) and R (2)] 2is referred to in this chapter as a "change in control".

A summary of the notification requirements described in this section is given in SUP 11 Annex 1.4

Sections 178(1) and 190(1)of the Act require a person (whether or not he is an authorised person) to notify the FSA in writing if he proposesto take a step which would result in his acquiring control or increasing or reducing his control over a UK domestic firm in a way described in SUP 11.4.2 R (1) to SUP 11.4.2 R (4), or acquiring or reducing his control in a way described in SUP 11.4.2 R (1) and (2). Failure to notify is an offence under section 191(1) of the Act (Offences under this Part).46

The Treasury have made the following exemptions:

1. (1)

   controllers and potential controllers of non-directive friendly societiesare exempt from the obligation to notify a change in control (The Financial Services and Markets Act 2000 (Controllers) (Exemption) Order 2001 (SI 2001/2638));

2. (2)

   controllers and potential controllers of building societies are exempt from the obligation to notify a change in control unless the change involves the acquisition of a holding of a specified percentage of a society's capital or the increase or reduction by a specified percentage of a holding of a society's capital (The Financial Services and Markets Act 2000 (Controllers) (Exemption) (No.2) Order 2001 (SI 2001/3338.)). The "capital" of a society for these purposes consists of:

   1. (a)

      any shares of a class defined as deferred shares for the purposes of section 119 of the Building Societies Act 1986 which have been issued by the society (in practice, likely to be permanent interest bearing shares (PIBS)); and

   2. (b)

      the general reserves of thesociety.3

If a person proposesto acquire control or increase hiscontrol over a UK domestic firm in a way described in SUP 11.4.2 R(1) to (4)or acquire control in a way described in SUP 11.4.2AR (1)4, he must obtain the FSA's approval before doing so. Failure to obtain approvalis an offence under section 191(3) of the Act (Offences under this Part). The FSA has up to three months to consider whether to approve such a change in control: see SUP 11.7 for guidance on the approval procedures.46

The FSA's approval is not required before a controller reduces hiscontrol over a UK domestic firm.

6The FSA recognises that firms acting as investment managers may have difficulties in complying with the prior notification requirements in sections 178(1) and 190(1)of the Act as a result of acquiring or disposing of listed shares in the course of that fund management activity. To ameliorate these difficulties, the FSA may accept pre-notification of proposed changes in control, made in accordance with SUP D, and may grant approval of such changes for a period lasting up to a year.

6Where the FSA approves changes in control proposed in a notice given under SUP 11.3.5B D:

1. (1)

   the controller remains subject to the requirement to notify the FSA when a change in control actually occurs; and

2. (2)

   the notification of change in control should be made no later than five business days after the end of each month and set out all changes in the controller's control position for each UK domestic firm for the month in question.

At that stage, the FSA may seek from the controller further information, including that which would have been supplied under SUP 11.3.7 D (2).

If a change in control occurs without the person himself having taken any step, he must notify the FSA within 14 days of becoming aware of the change (sections 178(2) and 190(2) of the Act). 6Failure to notify is an offence under section 191(2) of the Act.6

6The FSA considers that a custodian or its wholly-owned subsidiary nominee company, acting only in that capacity, does not itself take any step for the purposes of sections 178(2) and 190(2) of the Act when it becomes the controller of a UK domestic firm, its control of a UK domestic firm changes or it ceases to be the controller of a UK domestic firm as a result of acquiring or disposing of custody assets in the form of shares in accordance with its client's instructions.

6For the purposes of sections 178(2) and 190(2) of the Act and where there has been more than one change in control for each UK domestic firm in a fortnightly period, a custodian or its wholly-owned subsidiary nominee company to which SUP 11.3.6A G applies need only notify the FSA of its final control position for each UK domestic firm for that fortnight, so long as it also supplies the highest control position for each UK domestic firm it obtained during that period.

6Reporting by a custodian or its wholly-owned subsidiary nominee company does not relieve any other person with an interest in any custody assets from its control notification responsibilities under Part XII of the Act.

The FSA, for administrative reasons, expects notifications within SUP 11.3.7 Dthe relevant controllers form8, as appropriate. If notifications are not made on these forms the applicant must inform the FSA of the reasons for not using them.651

If a controller or proposed controller considers that the requirements in SUP 11.3.7 D to SUP 11.3.9 D are not appropriate to his circumstances (86 for example, if the control is temporary), he should consult the FSA. The FSA has power, under section 182(3)of the Act (Notification), to amend thoserequirements if it considers it appropriate to do so.8

The Act provides that the FSA may request any additional information or documentation from the controller or proposed controller that it reasonably requires in order to determine what action it is to take in response to the notification. A controller or proposed controller which is an authorised person is required to submit less information under SUP 11.3.7 D than other persons and consequently the FSA may ask for confirmation of details already held or any additional information which it consi3ders appropriate.

The FSA is obliged to consult regulatory authorities in other EEA States before approving the change in control or giving a warning notice where6 the Financial and Services Markets Act 2000 (Consultation with Competent Authorities) Regulations 2001 (SI 2001/2509, as amended) apply. In summary, these regulations require the FSA to consult with the home state regulator of an MiFID investment firm9, a BCD credit institution, an EEA insurer, an EEAUCITS management company or the parent undertaking of any of these, where that firm has acquired or proposes to acquire control of certain UK domestic firms such that the acquiring firm would become the parent undertaking of the relevant UK domestic firm. These regulations also impose certain consultation obligations on the FSA in respect of financial conglomerates.7

A notification given to the FSA by a person who is reducing his control over a UK domestic firm, in a way described in SUP 11.4.2 R(1) to (4), or must, in accordance with section 190(4) of the Act (Notification):46

1. (1)

   be in writing; and

2. (2)

   provide details of the extent of control (if any) which the controller will have following the change in control.

A person who is under a duty to notify the FSA of a proposed change in control is also required to notify the FSA when the relevant change in control has occurred (sections 178(3) and 190(3) of the Act). 6

6Notifications to the FSA by proposed controllers and controllers under Part XII of the Act may be made on a joint or shared basis outlined in SUP 11.5.8 G to SUP 11.5.10 G.

A summary of the notification requirements in this section is given in SUP 11 Annex 1.1

SUP 11 Annex 2 gives examples of the circumstances in which a notification in accordance with SUP 11.4.2 R is required.

If there is uncertainty whether a particular relationship constitutes control, it may be appropriate for the firm or controller or proposed controller to ask the FSA for individual guidance (see SUP 9) and to obtain its own legal advice. For example, if the control is to be held through a trust, then certain trustees, beneficiaries and other parties may qualify as controllers for the purposes of the Act and this chapter. Furthermore, a person may qualify as a controller if he is able to exercise 10%. (20% if the firm is a UK insurance intermediary) or more of the voting power at a firm's general meeting as a result of the ability to exercise proxy votes.1

If a firm is required to obtain approval from the Society of Lloyd's for any changes in its controllers, it should apply for this approval as well as notifying the FSA.

Principle 11 requires firms to be open and cooperative with the FSA. A firm should discuss with the FSA, at the earliest opportunity, any prospective changes of which it is aware, in controllers' or proposed controllers' shareholdings or voting power (if the change is material). These discussions may take place before the formal notification requirement in SUP 11.4.2 R, R or SUP 11.4.4 R arises. (See also SUP 11.3.2 G). As a minimum, the FSA considers that such discussions should take place before a person:1

1. (1)

   enters into any formal agreement in respect of the purchase of shares or a proposed acquisition or merger which would result in a change in control (whether or not the agreement is conditional upon any matter, including the FSA's approval); or

2. (2)

   purchases any shareoptions, warrants or other financial instruments, the exercise of which would result in the person acquiring control or any other change in control.

The obligation in SUP 11.4.2 R andSUP 11.4.2AR (1) and R (2) applies whether or not the controller himself has given or intends to give a notification, in accordance with his obligations under the Act.1

The steps that the FSA expects a firm to take to comply with SUP 11.4.10 R include, if applicable:

1. (1)

   monitoring its register of shareholders (or equivalent);

2. (2)

   monitoring notifications to the firm in accordance with Part 223 of the Companies Act 20063;

   33
3. (3)

   monitoring public announcements made under the relevant disclosure provisions of the Takeover Code or other rules made by the Takeover Panel;

   2
4. (4)

   monitoring the entitlement of delegates, or persons with voting rights in respect of group insurance contracts, to exercise or control voting power at general meetings.

In determining what the FSA would reasonably expect notice of in accordance with row (4) in SUP 11.5.1 R, a firm should have regard, in particular, to the following matters to the extent that the firm is aware of them:2

1. (1)

   whether the controller intends to make any significant changes to the firm's or firms' regulated activities, business plan or strategy as a result of the change in control;2

2. (2)

   whether the controller intends any restructuring either in terms of the legal form of the firm(s) or in its or their borrowings, capital restructuring or financing arrangements;2

3. (3)

   whether the FSA is obliged to consult with regulatory authorities in other EEA States (see SUP 11.3.14 G);2

4. (4)

   in the case of a share acquisition or similar, how it is to be financed;2

5. (5)

   whether the controller has any interests which may conflict with its role as controller of the UK domestic firm.2

Firms are also reminded of the circumstances set out in SUP 15.3.8 G (Communication with the FSA in accordance with Principle 11) which may arise on a change in control and which should also be notified.

Firms are reminded that a change in control may give rise to a change in the groupcompanies to which the FSA's consolidated financial supervision requirements apply. Also, the firm may for the first time become subject to the FSA's requirements on consolidated financial supervision (or equivalent requirements imposed by another EEA State). This may apply, for example, if the controller is itself an authorised undertaking. The FSA may therefore request such a firm, controller or proposed controller to provide evidence that, following the change in control, the firm will meet the requirements of these rules, if appropriate.

Firms are also reminded that a change in control may give rise to a notification as a financial conglomerate or a change in the supplementary supervision of a financial conglomerate (see GENPRU 3.14(Cross sector groups) and GENPRU 3.24(Third country groups)). 1

If a controller proposes any significant changes to the firm, for instance to its regulated activities, business plan or strategy, the firm may be requested to provide a business plan (see SUP 2: Information gathering by the FSA on its own initiative). If an insurer comes under the control of a new parent undertaking, such a business plan would be a scheme of operations in accordance with SUP App 2.

The FSA may request the firm to provide additional information (see SUP 2 (Information gathering by the FSA on its own initiative)). In determining any additional information requirements, the FSA will have regard to the supervision being exercised over the firm by any overseas regulators.

A firm and its controller or proposed controller may discharge an obligation to notify the FSA by submitting a single joint notificationcontaining the information required from the firm and the controller or proposed controller. In this case, the relevant controllers form3 may be used to submit a notification on behalf of both the firm and the controller or proposed controller.

If a person is proposing a change in control over more than one firm within a group, then the controller or proposed controller may submit a singlenotification in respect of all those firms. The notificationshould contain all the required information as if separate notifications had been made, but information and documentation need not be duplicated.

When an event occurs (for example, a group restructuring or a merger) as a result of which:

1. (1)

   more than one firm in a group would undergo a change in control; or

2. (2)

   a single firm would experience more than one change in control;

then, to avoid duplication of documentation, all the firms and their controllers or proposed controllers may discharge their respective obligations to notify the FSA by submitting a single notification containing one set of information.

Firms are reminded that SUP 15.6.4 R requires them to notify the FSA if information notified under SUP 11.4.2 R, R or SUP 11.4.4 R was false, misleading, inaccurate, incomplete, or changes, in a material particular. This would include a firm becoming aware of information that it would have been required to provide under SUP 11.5.1 R if it had been aware of it.1

A notification under SUP 11.6.4 R may be given jointly with the notification of the controller under SUP 11.3.16 G.

The approval procedures are summarised in SUP 11 Annex 3.

If the FSA decides to approve a proposed acquisition or increase of control unconditionally, it must give an 'approval notice' without delay (section 184(1) of the Act).

Alternatively, the FSA may decide to approve the proposed acquisition or increase of control subject to such conditions as it considers appropriate, having regard to the FSA's duty to ensure that the firm concerned will satisfy, and continue to satisfy, the threshold conditions (section 185 of the Act).

1. (1)

   If the FSA proposes to approve subject to conditions, it must give a warning notice.2

2. (2)

   If the FSA decides to proceed to approve subject to conditions, it must give a decision notice.2

A notice which approves a change of control (with or without conditions) is effective only for a limited period as set out in the notice (or, if no such period is specified, for one year) (section 184(3) of the Act). An approved change in control may not therefore take place after the end of this period.

The FSA may object to a proposed acquisition or increase of control unless it is satisfied that the approval requirements are met (section 186 of the Act). These are that:

1. (1)

   the acquirer is a fit and proper person to have the control over the firm that he has or would have if he acquired the control in question; and

2. (2)

   the interests of consumers would not be threatened by the acquirer's control or by his acquiring that control.

In deciding whether the approval requirements are met, the FSA must have regard, in relation to the control that the acquirer:

1. (1)

   has over the firm; or

2. (2)

   will have over the firm if the proposal to which the notification relates is carried out;

to the FSA's duty to ensure that the firm will satisfy, and continue to satisfy, the threshold conditions (section 186(3) of the Act).

1. (1)

   If the FSA proposes to object, it must issue a warning notice.2

2. (2)

   If the FSA decides to proceed with its proposed objection, it must issue a decision notice.2

3. (3)

   If the FSA considers that the approval requirements would be met if a particular step were taken or not taken, the decision notice must identify that step (section 186(4) of the Act).2

The FSA may also object if it has not received sufficient information from either the controller or the firm to satisfy itself that the approval requirements are met.2

The procedure followed by the FSA in relation to the giving of warning notices and decision notices is3 set out in DEPP 2.43

If the FSA receives a valid notification from a controller or proposed controller, the FSA must respond within three months (section 183(1) of the Act). The response from the FSA will be either an approval notice or a warning notice.2

1. (1)

   Where the FSA becomes aware of a possible breach by the controller or proposed controller of his obligations under section 178(1) or (2) of the Act (Obligation to notify the Authority), it may require the person concerned to provide additional information or documents (section 188(4) of the Act).2

2. (2)

   If the FSA is satisfied that a breach has occurred, but is not satisfied that the approval requirements are met, the FSA may give a warning notice to the controller or proposed controller (section 187(1) and 188(1) of the Act).2

3. (3)

   Alternatively, the FSA may retrospectively approve the change in control as if a notification had been received from the controller or proposed controller (section 187(2) of the Act).2

If the FSA does not receive a notification from the controller or proposed controller and proposes to give a warning notice, it must do so within three months of the date on which it became aware that the controller or proposed controller had failed to comply with his duty to notify (section 188(3) of the Act).

Before giving an approval notice orwarning notice , the FSAmust comply with certain requirements as to consultation with 1competent authorities outside the United Kingdom (sections 183(2) and 188(2) of the Act and the Financial Services and Markets Act 2000 (Consultation with Competent Authorities) Regulations 2001). The Financial Groups Directive Regulations make special provision in relation to (the change in control over a UK authorised person (within the meaning of section 178(4) of the Act) which is a member of a third-country group1

If a controller fails to give a notification under section 178 of the Act on acquiring or increasing control, and the FSA is not satisfied that the approval requirements are met, the FSA may propose to object to the controller by giving him a warning notice (sections 187(1) and 188(1) of the Act).2

The FSA may propose to object to a controller by giving him a warning notice at any time if it becomes aware of matters as a result of which it is satisfied that:

1. (1)

   the approval requirements are not met with respect to the controller; or

2. (2)

   a condition attached to an approval required the controller to do (or refrain from doing) a particular thing and that condition has been breached by the controller (sections 187(3) and 188(1) of the Act).

If the FSA gives a warning notice as described in SUP 11.7.14 G or SUP 11.7.15 G, section 188 of the Act sets out various requirements as to timetable, consultation and provision of information.

Following a warning notice as described in SUP 11.7.14 G or SUP 11.7.15 G, the FSA may decide to object to the controller and give him a decision notice. If the FSA does so, or if a conditional approval has been contravened, it may impose restrictions on some or all of the controller's shares by notice in writing or apply to the court for an order that the controller dispose of them (section 189 of the Act).

If it appears to the FSA that the likely effect of an acquisition of control on a firm, or on any of its activities, is uncertain, the FSA may, in accordance with section 46 of the Act (Variation of permission on acquisition of control), vary the firm's Part IV permission by:

1. (1)

   imposing a requirement (see SUP 7: Individual requirements); or

2. (2)

   varying an existing requirement.

The warning notice and decision notice procedure does not apply to action taken under section 46 of the Act, but the FSA will operate a procedure that is fair in the circumstances.

In assessing whether a matter should be notified to the FSA under SUP 11.8.1 R (1), SUP 11.8.1 R (2) or SUP 11.8.1 R (3), a firm should have regard to the guidance on satisfying threshold condition 5 (Suitability) contained in COND 2.5.

In respect of SUP 11.8.1 R (3), the FSA considers that, in particular, the removal or replacement of a majority of the members of a governing body (in a single event or a series of connected events) is a substantial change and should be notified.

If a matter has already been notified to the FSA (for example, as part of the firm's application for a Part IV permission), the firm need only inform the FSA of any significant developments.

The level of a firm's awareness of its controller's circumstances will depend on its relationship with that controller. The FSA does not expect firms to implement systems or procedures so as to be certain of any changes in its controllers' circumstances. However, the FSA does expect firms to notify it of such matters if the firm becomes aware of them, and it expects firms to make enquiries of its controllers if it becomes aware that one of the events in SUP 11.8.1 R may occur or has occurred.

The FSA may ask the firm for additional information following a notification under SUP 11.8.1 R in order to satisfy itself that the controller continues to be suitable (see SUP 2: Information gathering by the FSA on its own initiative).

Guidance on what constitutes a close link is provided in COND 2.3.

The FSA may ask the firm for additional information following a notification under SUP 11.9.1 R in order to satisfy itself that the firm continues to satisfy the threshold conditions (see SUP 2: Information gathering by the FSA on its own initiative).

1The FSA considers that monthly reporting of changes in close links will ordinarily only be appropriate for firms forming part of large groups.

SUP 11 Annex 1G 1