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LEGAL ANALYSIS: [2002] J.LB.L.
Taking and Enforcing Security Over
Authorised Persons
Andrew Petersen and Daniel Bendor
Dechert*
Introduction
In the United Kingdom there are many companies
which operate under the regulatory umbrella of organisations such as the Financial Services Authority
(FSA) and hold themselves out as "regulated by the
FSA". These companies are "UK Authorised Persons" for the purposes of the Financial Services and
Markets Act 2000 (FSMA). Largely, this causes few
problems when dealing with them. However, the
added level of regulation imposed by the FSA and
the FSMA (taken in its broadest sense to include
all of the ancillary rules, regulations, guidelines
and other statutory or "voluntary" requirements)
results in a number of factors, largely overlooked by
borrowers, lenders, and their respective legal
advisers, which should be taken into account, in
relation to both granting and taking security over
such entities. These are dealt with in outline below.
Types of Security
The most common form of security a lender is likely
to request is that the authorised person enter into an
all assets debenture (AAD). An AAD, comprising a
blanket charge over all the assets of the entity,
coupled with a floating charge (under section 29 of
the Insolvency Act 1986) will necessarily provide
the bank with a type of security with which it is
most comfortable. In some cases, the lender may also
request that, if the authorised person is a limited
company, it will also grant a charge over all its
called and uncalled share capital.
There are two issues to consider when taking such
security:
•
•
the extent of the security; and
the enforcement of that security.
These will be dealt with in turn.
Minimum Capital Adequacy
Requirements
As stated, an AAD results in security being granted
over all the assets of the company. If, as in the
majority of cases, such security is sought, a question
* Andrew Petersen and Daniel Bendor specialise in international acquisition finance and are in the London banking
department of Dechert, an international law firm with 14
offices throughout the U.S., the U.K., and Continental Europe.
arises as to the extent to which an authorised person
can grant security over the assets that form part of
its minimum capital adequacy requirements (or minimum capital and financial resources requirements,
"MCAR") for the purposes of its FSA approval.
Given that the value of the authorised person is
dependent upon it retaining its FSA authorisation,
as without it the entity may be carrying on business
in contravention of the FSMA and risks being liquidated by the FSA, a question arises as to whether the
MCAR should be carved out of the security to be
given to the lender. MCAR relates to being able to
carry on business, so can include premises and computer equipment. A decision to carve out the MCAR
so that the company can at all times operate in accordance with the FSA's regulations is beneficial to the
borrower and provides some comfort to its directors.
It could also be argued that it provides a benefit to
the lender as the company is obviously worth more
to the lender as a regulated entity than one which
has lost its regulation and is operating unlawfully.
With these arguments in mind, consideration should
be given as to the wording of any carve out.
The most sensible option would seem to be general wording. The MACR requirements, although
currently under review, are not frequently changed
by the FSA, However, they could change over the
lifetime of the debenture and, to avoid making a
nonsense of the charging document, reference should
be made to the requirement and specifics kept to a
minimum. There is no discernible benefit to either
lender or borrower (or legal counsel) in trying to nail
jelly to the wall.
Enforcement and Acquiring Control
Once the extent of the security has been determined
and the security given, the result flowing from enforcement must be considered. Sections 178 to 192
of the FSMA deal with "acquiring control" over a
U.K. authorised person. A person acquires control
over an authorised person when he:
• holds 10 per cent or more of the shares in the
authorised person or the parent undertaking of
the authorised person; or
• is able to exercise significant influence over
the management of the authorised person or the
parent by virtue of his shareholding in the authorised person or the parent; or
• is entitled to exercise, or control the exercise
of, 10 per cent or more of the voting power in
the authorised person or the parent; or
• is able to exercise significant influence over
the management of the authorised person or the
parent by virtue of his voting power in the
authorised person or the parent.
In essence, a lender who proposes to enforce his
security resulting in the lender either:
• taking control of an authorised person; or
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LEGAL ANALYSIS: [2002] J.LB.L.
• increasing their relevant control of that
authorised person; or
• acquiring an additional kind of control,
must not only notify the FSA of any intended enforcement, but must also receive the FSA's approval
before going ahead. Notification to the FSA must be
in writing and include such information and be
accompanied by such documents as the FSA may
reasonably require. The FSA may require the person
giving a notice of control to provide such additional
information or documents as it reasonably considers
necessary in order to enable it to determine what
action it is to take in response to the notice.
A person, who does not take control himself, such
as a lender who has inadvertently enforced his
security resulting in him acquiring control over
an authorised person, must notify the FSA within
14 days of becoming aware that he has acquired such
control. Failure to do so could result in criminal
liability of the directors of the lender, resulting in a
fine or prison sentence, or both. Any enforcement
over the shares in the authorised person necessarily
falls into this category.
Following receipt of a notice of intention to take
control, the FSA must, within three months of receipt
of the notice of control, determine whether to approve
of the person concerned having the control to which
the notice relates or to serve a warning notice. Before
doing so, the FSA must comply with such requirements as to consultation with competent authorities
outside the United Kingdom as may be prescribed
below.
A further issue is that a fixed and floating charge
over all or substantially all the assets of the company
may, on crystallisation, cause the same type of problems on enforcement. Appointing a receiver, administrative receiver or an administrator is, technically,
also a change of control. Coupled with the insolvency practitioner's statutory duty to report to the
FSA and the FSA's right to participate in the proceedings this can all add up to being a potentially
tortuous and time-consuming process.
This should not be taken to mean that the security
is valueless, nor that enforcement is impossible. The
FSMA merely adds further levels of compliance and
bureaucracy to the process. It may take longer than
usual, but hopefully not be impossible. The FSA is
there to protect investors and clients and has
reasonably wide powers to do so.
Cross-border Enforcement
In many cross-border transactions, a European lender
will take security over a U.K. authorised person.
Under the FSMA, the FSA may exercise its power of
intervention in respect of a firm which, through
enforcement, acquires control over an authorised
person, at the request of, or for the purpose of
assisting, an overseas regulator. According to section
193 of the FSMA an overseas regulator means an
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authority in a country or territory outside the United
Kingdom which is a home state regulator, or which
exercises any function of a kind mentioned in section 195(4) of the FSMA. A home state regulator
means the competent authority (within the meaning
of the relevant single market directive) of a European
Economic Area (EEA) state (other than the United
Kingdom) in relation to the EEA firm concerned. An
EEA firm means:
• an investment firm (as defined in Article 1.2
of the Investment Services Directive) which is
authorised (within the meaning of Article 3) by
its home state regulator;
• a credit institution (as defined in Article 1 of
the Banking Consolidation Directive) which is
authorised (within the meaning of Article 1) by
its home state regulator;
• a financial institution (as defined in Article 1
of the Banking Consolidation Directive) which is
a subsidiary of the kind mentioned in Article 19
and which fulfils the conditions in Articles 18 and
19; or
• an undertaking pursuing the activity of direct
insurance (within the meaning of Article 1 of the
first Life Insurance Directive or of the first Nonlife Insurance Directive) which has received
authorisation under Article 6 from its home state
regulator.
If a request to the FSA for the exercise of its power
of intervention has been made by a home state
regulator in pursuance of a European Community
obligation, or a home state regulator has notified the
FSA that an EEA firm's authorisation has been withdrawn, the FSA must, in deciding whether or not to
exercise its power of intervention, consider whether
exercising it is necessary in order to comply with a
Community obligation. In deciding in any case in
which the FSA does not consider that the exercise of
its power of intervention is necessary in order to
comply with a Community obligation, it may take
into account in particular:
• whether in the country or territory of the overseas regulator concerned, corresponding assistance would be given to a U.K. regulatory
authority; or
• whether the case concerns the breach of a law,
or other requirement, which has no close parallel
in the United Kingdom or involves the assertion
of a jurisdiction not recognised by the United
Kingdom; or
• the seriousness of the case and its importance
to persons in the United Kingdom; or
• whether it is otherwise appropriate in the
public interest to give the assistance sought.
Conclusion
Careful thought needs to be given as to the extent of
the security, the effect of enforcing such security and
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LEGAL ANALYSIS: [2002] J.LB.L.
how the FSA and FSMA requirements on both the
authorised person and the lender will affect the transaction. In the United Kingdom, best practice would
dictate that any lender enforcing his security over an
authorised person should notify the FSA at the
earliest opportunity of what it intends to do so that
feedback may be sought in a timely manner. Not
only this, but, in so doing, the lender will, at all
times, comply with the FSA's Conduct of Business
rule 11.
Similarly, a U.K. authorised person who is a borrower which has granted security in the knowledge
that there is to be a change of control over it, should
comply with all the relevant notification requirements and notify the FSA and the lender to which it
has granted security. A change of control prohibition
contained in the debenture will often result in an
event of default under that debenture and thus would
enable the lender to decide to enforce its security.
In each case, the time-scales and the powers of the
FSA are significant and are only ignored at the peril
of a U.K. authorised person giving security and the
lender enforcing such security.
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