The UK financial services sector is a complex and highly regulated industry, meaning the sale of a business needs to adopt an appropriate structure with expert legal and tax advice to ensure a smooth and compliant transaction. We highlight below the key legal considerations that sellers of financial services businesses should be aware of to assist with their transaction.

Regulatory considerations

Where a financial services business is regulated by the Financial Conduct Authority (FCA), changes in this business’ shareholders will likely require the prior consent of the FCA itself. This consent is not necessary for business transfers involving companies that are not directly regulated by the FCA (for example appointed representatives, although there will be separate discussions with the principal firm about any sales!), or where only the assets and clients of a business are being sold.

This is because the FCA’s overarching objective is to protect financial consumers whilst ensuring the stability of the UK’s financial system.  The FCA maintains a register of all the financial services companies in the UK and who owns them.  When a sale of a business takes place the FCA has to update their register. 

The seller will need to provide comprehensive information about their business, its financial performance and its regulatory history.  The buyer will need to demonstrate its suitability to acquire the business and to meet the FCA’s regulatory requirements.

This is an involved process from all parties to a transaction and as such all parties will need to have considered carefully how best to structure the transaction before proceeding.

Due diligence

As a result of the financial services sector being highly regulated, a buyer is likely to carry out significant due diligence on the target business.

Due diligence is essentially an investigation exercise conducted by a buyer into all elements of a target business, including  all financial accounts, tax compliance, legal compliance and importantly regulatory compliance (in particular with the FCA’s own rules and regulations).

From a seller’s perspective, it would be worth instructing solicitors as soon as possible once the decision to sell has been made to conduct a review of all elements of the business’ legal compliance. Waiting for a buyer to be identified and then being reactive to a buyer’s due diligence exercise is  likely to cause delays with the wider transaction completion.  

Consideration

Thought should also be given to how the consideration under a proposed transaction in the financial services sector is structured.

While this is a commercial factor that is to be discussed between a buyer and a seller, there are various elements to the consideration structure that are always discussed within the legal documentation. In particular:

• The parties need to agree how to treat any capital adequacy of a business following completion. Is the seller to be paid for this by the buyer? Is the seller expected to keep this in the business? These are questions that the parties need to raise as soon as possible in the transaction.
• Agreement needs to be reached as to whether there will be any payments in connection with the balance sheet of a business at completion. This is a typical position where there are share transfers in the financial services industry, but from a buyer’s perspective has this been taken into account within the initial offer?
• It is usual in a financial services transaction for there to be a payment at completion of a transaction, but for further payments to be paid in the period following completion depending upon the performance of the transferred business following completion.

In the financial services sector, the calculation of these payments can link to complex formulae and as such it is essential that the drafting of the legal documentation is clear to avoid any disputes arising between the parties.

• From the perspective of a seller, appropriate protections will need to be added to the legal documentation to maximise the consideration that is payable. This discussion should start at whether there is any formal security that can be offered, and will likely extend to contractual assurances being provided by the buyer.

Restrictions

It is common for business transfer documents to also containing what are known as restrictive covenants.  These restrict the seller’s ability to compete against the buyer’s business for a set period of time following completion.  We can advise a seller on the sort of restrictions and the time periods that are usual for their type of transaction.

In the financial services industry, there is a significant amount of overlap between the different offerings that are provided to clients, and so it is essential for a seller to draft the restrictive covenants appropriate to avoid future business activities being impacted.

Conclusion

Mergers and acquisitions in the financial services industry are frequent occurrences, but in order for a transaction to proceed effectively and without incident, appropriate legal advice is required from the very beginning.

Please contact us to speak to a member of our Corporate Team if you are planning to sell your financial services business.