Here at KPMG (and in the payments industry as a whole) we have seen a significant uplift of mergers and acquisitions activity (M&A) in recent months. This is expected to result in the Financial Conduct Authority (FCA) receiving a significant number of ‘Change in Control’ requests.
Changes in control are a matter that the FCA attaches great importance to, placing increased scrutiny upon applications. According to FCA operating service metrics, there hasn’t been a single quarter throughout FY 2023/24 that all Change in Control applications were resolved within the 60-working days’ statutory timeframe. These delays have been attributed to the increasing case complexity and poor-quality applications.
In our view, this is also a reflection of firms not being on the front foot, the Regulator is likely to seek immediate clarity on post-merger integration (PMI) for important areas such as risk and compliance functions, and the common certainty among firms about how these are going to look like from day one.
This can be particularly tricky for the payments sector, where we have observed a pattern when acquiring and acquired firms engage in very different business lines to unlock external growth, with the consequence of misaligned business models, risk appetites, risk and compliance controls and cultural differences.
Spotting culture clashes to align compliance
From a cultural perspective, the FCA defines culture as ‘the habitual behaviours and mindsets that characterise an organisation’. Culture is unique to each organisation, which means that risk and compliance teams have a complex task of aligning compliance culture across the merged business as early as practicable. The more divergent culture is, the more likely the approaches to risk and risk appetite will differ, and the earlier the tone is re-set at the top the better.
Hindsight, insight and foresight: the three pillars of PMI for compliance teams
In addition to culture, compliance teams of payment firms dealing with PMI could consider running a three-pillar analysis to assess the past, present and future state. This will help form the basis of integrated compliance programme management. The following components are likely to generate value throughout the integration process:
Past – A few questions to be asked might comprise:
- Can lessons learned from past shortcomings by either M&A party be extended to the other party?
- Similarly, can process improvements be extended to the other party in a product/service-agnostic manner; or do low-level refinements need to take place before that can happen? For example, Consumer Duty compliance issues are a matter of close scrutiny by the FCA when considering change in control notifications.
Present – The current state evaluation might consider:
- A comparison of the latest enterprise-wide risk assessment of both the firms, which can give immediate visibility on areas of higher or lower resource demand to address day one risks as well as to support an optimised cost-efficient integration of compliance teams.
- A comparison of risk appetites and risk and control frameworks would highlight any variances that need to be addressed to achieve consistency across the two businesses.
- Any ‘red flags’ that emerged during the due diligence process that need immediate attention to be addressed.
Future – As part of the PMI activities, the future business strategies should be considered, for example:
- If changes to the range of regulated activities are anticipated, how will PMI planning and implementation take into account and deploy the necessary uplifts to governance arrangements and compliance functions?
It is a fresh start, not a formality
A Change in Control application is likely to amount to a highly transformational variation of authorisation. It should therefore be treated with the same seriousness of applications for FCA authorisations.
Please see our latest articles on the key areas of the FCA’s scrutiny over the processing of payments and e-money authorisation applications.
How we can help
Our team has significant experience in working with a wide range of payment firms with different business models and services and their FCA authorisation initiatives.
Our breadth of industry experience and detailed understanding of regulatory expectations makes us well position to help your firm’s M&A strategy. Please do not hesitate to reach out for more details on how we can help.
