Update – FCA Consults on Criminal Background Checks on Controllers

Introduction

Once a quarter, the FCA consults on proposed miscellaneous amendments to its Handbook. These tend to be relatively minor changes. However, the most recent set of changes includes one of note. In its latest Quarterly Consultation Paper (CP24/11), the FCA has proposed to require individuals that will become controllers and beneficial owners of UK authorised firms to obtain criminal background checks. This would occur when the firm is first authorised, and on any subsequent change in control. Obviously, criminal records checks would only be undertaken against individual persons, not companies (and, notably, would not apply to directors of corporates). The new rules would take effect from January 2025. The consultation is open for 5 weeks.

Scope

The definition of a "controller" in the CP is broad. It includes: (a) controllers of firms applying to become authorised; (b) would-be controllers applying for permission for a change in control of an authorised firm under Part XII of FSMA; (c) would-be controllers of firms who are caught by the UK Money Laundering Regulations (including firms such as consumer credit lenders and certain other types of lenders, safe custody providers, money brokers and financial leasing companies; (d) would be controllers of firms under the Payment Services Regulations 2017 (PSRs) or the Electronic Money Regulations 2011 (EMRs); (e) individuals with a "qualifying holding" in a payment institutions or e-money institution; and (f) beneficial owners of registered crypto-asset businesses.

The criminal record check would be required for the controller or beneficial owner irrespective of where that person is located.

The proposals do not cover controllers of appointed representatives or agents under the PSRs or EMRs.

The Criminal Record Check

Under the FCA’s proposal, the relevant individual in England will need to get a criminal background check from the Disclosure and Barring Service (DBS). If the individual is outside England, they will need to obtain an “equivalent” check. There is no discussion of what might be considered “equivalent”. The FCA says that it can exercise discretion in cases where an individual is not able to obtain an equivalent to a UK criminal record check, although there is very little detail on this. The DBS check or equivalent must have been obtained within the six months preceding the notification / application.

Unless specified otherwise, a “standard” DBS check would be required. This shows spent and unspent convictions, as well as cautions and warnings. This is notable because the standard DBS check is more detailed than the “basic” DBS check, which does not show spent convictions.

Commentary

Although the FCA proposal to require criminal record checks does not appear unreasonable per-se (and indeed is in line with FATF recommendations), it is notable because it is likely to slow up the existing change in control process. Individuals will need to obtain their criminal records checks before the relevant form is lodged with the FCA. This means that the timing will need to be built into the timetable for acquisitions and other instances where the change of control approval is required (e.g. restructuring, changes of beneficial owner). The FCA commented that, after filing, the process shouldn’t take any longer than currently, but that is not really the point: the slow-down will occur before filing. That also assumes, of course, that the criminal record check doesn’t throw up any adverse findings!

DBS checks normally take around two weeks to obtain. The FCA say that it looked at other jurisdictions as part of its cost-benefit analysis and normally the equivalent to a DBS check comes back within 20 days.

Should we respond to the Consultation?

There may be merit in responding to the consultation if you believe you may be submitting a change of control notification from January next year onwards (when the new criminal record check requirement will apply). This is particularly the case if you think the application may involve overseas persons, as this is the area which involves the most uncertainty.

The consultation closes on 12 August 2024.

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