There are just shy of 100 domestic regulators that could have an impact on corporate actions including acquisitions in the UK – depending on the nature of the deal, the type of investment and the industrial sector – and some obviously to a lesser extent than others. The good news is that no single transaction would need to satisfy them all. On international deals there are, of course, all the regulators in other jurisdictions.
The Future Regulatory Framework (FRF) Review was set in motion last year by UK chancellor of the exchequer Rishi Sunak to determine how the financial services regulatory framework should adapt to the UK’s new position outside of the EU. The framework would need to be ‘fit for the future’ – in the government’s own words: “a coherent, agile and internationally respected approach to financial services regulation”. Rather than a bonfire of red tape, it would have to ensure that being nimble also came with appropriate protections to promote financial stability.
Here are the key bodies and how they fit into the corporate finance world.
Financial Conduct Authority (FCA)
The Financial Services and Markets Act 2000 (FSMA) delegates setting regulatory standards to expert, operationally independent regulators, with a policy framework set by government. The FCA’s origins go back to 1985 and the foundation of the Securities and Investments Board (SIB). It became the Financial Services Authority (FSA) in 2001, but after the regulatory failings that contributed to the 2007-2008 global financial crisis, it was split into the Prudential Regulation Authority and the Financial Conduct Authority (FCA). The FCA is the key regulator for corporate finance work: FCA permissions are required for firms advising on and arranging deals in investments, carrying on regulated activities and making arrangements with a view to transactions in investments.
“While one of the roles of the FCA is to promote healthy competition in the financial services industry, it is not the role of the FCA to investigate and take action against anti-competitive behaviours – that is the remit of the CMA [Competition and Markets Authority, see page 26],” explains Selina Sagayam, corporate partner and co-head of ESG at Gibson Dunn. “Additionally, the FCA has a keen focus on ensuring we have an orderly and stable financial services industry, and to ensure fair consumer outcomes.”
Yvette Allen, head of technical in Deloitte’s transactions services team and chair of the Corporate Finance Faculty’s technical committee, says: “The primary roles of the FCA and BEIS [Department for Business, Energy and Industrial Strategy] are investor protection, the smooth running of financial markets and the protection of national security in relation to businesses in specific sectors of strategic importance.”
In March 2021, the UK Listings Review, led by Lord Jonathan Hill, had 15 recommendations to make London’s capital markets more nimble, but well regulated, to ensure they remained competitive as global capital markets changed.
Nikhil Rathi, former CEO of London Stock Exchange Group, has been chief executive of the FCA since 2020. Charles Randell, a former corporate partner at Slaughter and May, has been chair since April 2018. In October 2021, Randell asked Sunak to begin the process of looking for a successor. The plan is for his replacement to take over in the spring: “It’s the right time to hand over the oversight of the rest of the transformation programme to a chair who can see it through to completion”. The programme is not expected to be completed by spring 2023.
Ian Shawyer, head of private equity and financial sponsors at Travers Smith, says: “The FCA has a very broad remit, and inevitably has come under scrutiny for one or two things. Regulators can be a bit of a political scapegoat for governments and they can find themselves sitting on top of what can become a fairly high-profile or difficult situation. From time to time, it might look like there’s a bit of a difficulty in finding the next leader for a regulator. By and large, the people leading our various regulatory regimes are high quality and bring stability to challenging roles.”
ICAEW responded to recent government proposals for a Future Regulatory Framework. The FCA would get more power, but ICAEW emphasised the important roles of, for instance, the House of Commons European Scrutiny Committee. The FCA would also be given new growth and competitiveness objectives, which increases the pressure to lower regulatory standards.
Financial Reporting Council (FRC)
The FRC’s stated mission is to promote “transparency and integrity in business”. It sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work, which corporate financiers will adhere to, be it for public markets or private transactions. The FRC also monitors and takes action to promote the quality of corporate reporting, sets auditing and ethical standards, and monitors and enforces audit quality.
Deloitte’s Yvette Allen explains: “The FRC has an impact on those firms with both an audit practice and a corporate finance practice in that it limits those firms from providing certain non-audit services to audit clients.”
Sir John Kingman was commissioned by the government to carry out a root-and-branch review of the FRC. The Kingman Review was published in December 2018 and had 83 recommendations, including that it “be replaced with an independent statutory regulator, accountable to parliament, with a new mandate, new clarity of mission, new leadership and new powers” – the Audit, Reporting and Governance Authority (ARGA).
Since the review, the FRC has been in governance disarray. The timetable for the ‘transition’ to ARGA has been a moveable feast – the most recent pronouncement was that it would be spring 2023.
Last month, secretary of state for business, energy and industrial strategy Kwasi Kwarteng announced that Sir Jan du Plessis would be the new chairman of the FRC and its successor, ARGA. Four non-executive directors – Angela Cha, Sir Ashley Fox, Clare Thompson and David Willis – were also appointed to its board. Prior to that, it had only three directors, after what could be described as an exodus following Kingman’s pretty damning review. There had been no chair since October 2021, when interim chairman Keith Skeoch stepped down. He’d been in the role a year, after he took over from Simon Dingemans, who left to join Carlyle Group in May 2020 after just eight months in the role.
The appointment of du Plessis, a former chair of BT and Rio Tinto, is for four years.
Competition and Markets Authority (CMA)
The CMA came into being in 2013, after the government’s then Department for Business, Innovation and Skills (BIS) sought to strengthen UK competition regulation by merging the Office of Fair Trading and the Competition Commission. The CMA not only looks to prevent mergers from reducing competition, creating monopolies or duopolies, but it also wants to create more competition. Last September, the Office for the UK Internal Market (OIM) was created within the CMA to ensure that UK internal markets are being served by regulations.
Dr Andrea Coscelli became chief executive of the CMA in 2017, but at the end of last year he announced he would step down in July 2022.
According to Stephen Whitfield, a competition partner at Travers Smith: “Dr Coscelli has been a high-profile leader of the CMA. He introduced a number of reforms to its practices, but he also developed its substantive approach to cases in a number of interesting and quite groundbreaking ways, when you look at them internationally. It’s looking for a new chief executive at a time when it no longer falls within the scope of the wider EU competition regime. So it now has much more independence, for example, as regards reviewing larger transactions. The CMA is likely to continue developing its presence on the international stage, so it might be an attractive role for a future head. We’ll see how that plays out.”
Takeover Panel (TP)
Set up in 1968, the Panel on Takeovers and Mergers – commonly referred to as the Takeover Panel – administers the Takeover Code. For corporate financiers, controlling takeovers of London-listed companies or investments by companies subject to the UK Code are regulated by the Takeover Panel.
The Code primarily aims to ensure that shareholders are treated fairly and given the chance to weigh up the merits of a takeover. It also provides the framework that ensures takeovers are conducted in an orderly manner.
Last July, Ian Hart, joint chairman of UK investment banking at UBS, was appointed director general of the Takeover Panel. Hart is steeped in corporate finance. During the course of a 30-year investment banking career, he has acted on hostile and recommended bids and bid defences, mergers, acquisitions and disposals, equity issues and corporate reorganisations.
ICAEW’s president is always a member of the Takeover Panel. Current president William Brooks represents ICAEW on the panel, supported by the Corporate Finance Faculty, with member views. KPMG partner Helen Roxburgh and PwC partner Joseph Katz are ICAEW’s alternates.
Department for Business, Energy and Industrial Strategy (BEIS)
Kwasi Kwarteng is secretary of state for business, energy and industrial strategy. BEIS was formed in 2016, with the merger of the Department for Business, Innovation and Skills (BIS) and the Department of Energy and Climate Change (DECC).
The biggest recent development perhaps is that within BEIS. The Investment Screening Unit (ISU) has been set up to look at investments referred to it under the National Security and Investment Act (NSIA), which came into effect at the start of the year. The faculty was heavily involved in ensuring members’ views were taken into account in the drafting of the NSIA. David Petrie, ICAEW’s head of corporate finance, is a member of the ISU expert panel.
The others
All London Stock Exchange member firms are bound by the Rules of the London Stock Exchange and must ensure compliance with these.When it comes to infrastructure transactions, advisers will have to deal with various relevant, sector-specific regulators that will look at monopoly issues, including:
- OFWAT (The Water Services Regulation Authority);
- ONR (Office for Nuclear Regulation);
- OGA (Oil and Gas Regulator);
- OFCOM (Office of Communications);
- ORR (Office of Rail and Road); and
- CAA (Civil Aviation Authority).
The Green Technical Advisory Group (GTAG) will oversee the government’s delivery of a ‘Green Taxonomy’ – a common framework setting the bar for investments that can be defined as environmentally sustainable.
The Pensions Regulator (PR) can get involved where there are question marks over the adequate funding of a pension scheme in a target.
The Solicitors Regulation Authority (SRA) is the regulatory body for solicitors and it has standards that apply to work carried out by corporate lawyers in the context of transactions.
The Serious Fraud Office (SFO), the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) and HMRC have anti-money-laundering (AML) remits. Interestingly, the EU is setting up the AML Authority (AMLA) to bring all of that activity under one umbrella in the 27 member states.
The Employment Appeal Tribunal enforces TUPE, ICAEW can license firms to undertake investment business, and HMRC rulings on eligibility for tax reliefs are also all regulators that can affect deal processes.
Private equity view
Chris Watt, a managing partner at ECI Partners and member of the Corporate Finance Faculty’s Board
“There’s always a balance to strike with regulation and I don’t feel the balance in the UK is unreasonable. Sometimes it can feel a little slow and clunky, maybe the wheels could be oiled and it could be a bit more efficient and responsive for the deal environment. We’re used to working to extremely tight deadlines so you might exchange on a deal in just a few weeks and then it takes another six months to obtain regulatory approval.
“Regulation fulfils an important role, ensuring we have a robust and respected regulatory environment that makes the UK an attractive place to do business, and inspires business confidence, particularly for international investors looking to invest in the UK.
“But at the same time, we want the UK to be seen as an investment environment that is viewed positively internationally. At the moment, there’s a focus on the extent of money laundering that goes on in London and there will be further legislation coming in to protect against that. As a private equity investor, much of our deal activity is unlikely to be problematic within these regulatory frameworks, yet we have to go through the full extent of compliance with regulations and procedures. But that’s fine – I simply view it as part and parcel of life as an investor.”
Role of advisers
Yvette Allen, head of technical in Deloitte’s transactions services team and chair of the Corporate Finance Faculty’s technical committee
“The role of chartered accountants, lawyers and investment bankers is to understand the objectives of regulators and communicate with them to facilitate the achievement of such objectives by ensuring there are no misunderstandings, inconsistences and unintended adverse consequences while regulation is being designed and implemented.
“As new regulation comes into force, our role is to inform and support our clients to enable them to take into account such regulation in reaching their investment decisions and executing those deals in a compliant manner.”
Future regulation
Selina Sagayam, a corporate partner and co-head of ESG at Gibson Dunn, and a member of the Corporate Finance Faculty’s board“You need to have a framework. The review a couple of years ago basically endorsed the FSMA approach. But the review also concluded that we suffered during the recent period because EU regulation has stymied an agile regulation model – it required lots of very prescriptive rules adopted at a national level. We have an opportunity to change the UK financial services and regulatory framework and structure. It’s going to take a few years, though – it’s like turning around an oil tanker.
“Going forward, perhaps eliminating duplication between the regulators in the UK would be one thing to think about. We need to stand back and look at what the key elements in the UK regulatory structure are. What do we need? Where do we need to go? There are opportunities as a result of Brexit to make our own way. It’s generally accepted that regulation around the UK financial services industry needs a bit of reform. What’s been going well? What less so? What needs improvement?
“We have operationally independent regulators who have the flexibility to set and amend the rules as markets and the nature of financial services or other relevant sectors change. One thing we should have picked up in recent years – which have seen a proliferation of new technologies and business models at great pace (which only accelerated during the pandemic) – is the importance of having that agility, to stay ahead or at least stay with market and technological developments such as digitisation, technology, distributed ledger or crypto.
“Because climate and the environment is a shared global problem, one would have hoped that we managed to put politics away. But already we’re seeing a fight over taxonomy regulations – how you classify sustainable investments. The EU has its own; the UK will come up with its own. A number of Asian nations are also developing their own taxonomies.
“It’ll potentially change the whole economics of capital markets and where to raise capital for green funds.”
