Change of Control

A change of control is a transaction or event that shifts ownership of, or the power to direct, a licensed financial institution across a threshold set by its regulator. Banks, money transmitters, payment institutions, e-money issuers, broker-dealers and crypto-asset service providers are typically barred from completing such a change until the regulator has cleared it. Depending on the regime, clearance takes the form of an explicit approval or of the regulator not objecting within a fixed assessment window.

The focus of the review is the incoming owner, not the commercial terms of the deal. Regulators ask whether the people and companies gaining control are fit, proper, financially sound and able to keep the licensee compliant. A buyer acquiring a licensed business is therefore, in effect, applying to be licensed as its owner.

Triggers vary by jurisdiction and license type, but commonly include:

• Acquiring a direct or indirect shareholding or voting interest at or above a set percentage, frequently 10% or 25%.
• Increasing an existing holding across further thresholds, such as 20%, 30% or 50% in European regimes.
• Gaining the power to appoint a majority of the board or otherwise direct management and policies, regardless of shareholding.
• Upstream changes higher in the group, such as the sale of a parent company or a fund acquiring the holding company, which change indirect ownership of the licensee.

Each person who would cross a threshold usually becomes a control person with their own disclosure obligations, and changes in the ultimate beneficial owner are central to the analysis.

In the United States, each state that issues a money transmitter license regulates changes of control under its own statute, so a multistate licensee may need dozens of separate clearances. The Money Transmission Modernization Act (MTMA), the model law developed with the Conference of State Bank Supervisors (CSBS), defines control as the power to vote 25% or more of a licensee's voting securities, or to elect or appoint a majority of key individuals, and presumes control at 10% unless rebutted. States that adopt it align their procedures, but adoption is not uniform.

Filings are made through NMLS, including the NMLS MU filings for the company and each new control person. Incoming owners typically provide fingerprints for criminal history checks, a background check, credit reports, biographical affidavits, financial statements and evidence of source of wealth. Some regulators, notably the NYDFS, are known for detailed reviews.

In the United Kingdom, Part XII of the Financial Services and Markets Act 2000 requires anyone proposing to acquire or increase control of an authorized firm to notify the FCA, or the PRA for dual-regulated firms, and wait for approval. The regulator has 60 working days to assess a complete notice, extendable when it requests further information, and completing without approval is a criminal offence. Equivalent rules apply to payment and e-money institutions under the UK payment services and e-money regulations.

In the European Union, banking law and the payment services framework under PSD2 use the concept of a qualifying holding, generally 10% or more, with further thresholds at 20%, 30% or one third, and 50%. The assessment criteria for credit institutions include the acquirer's reputation and financial soundness, the integrity of the proposed management, the firm's continued ability to comply with prudential rules, and whether there are grounds to suspect money laundering or terrorist financing.

Because approval can take months, acquisition agreements for licensed firms make regulatory clearance a condition of closing and include long-stop dates. Buyers often prepare a full due diligence pack for regulators in advance. Regulators may also re-test whether the licensee will continue to meet tangible net worth and other capital requirements under the new owner. Failing to obtain prior clearance can lead to fines, orders to divest, or suspension of the license, and in a license sponsorship or acquisition-for-license strategy, the change of control review is often the longest step.