The FCA has recently published a new consultation on their approach to authorisation seeking to ensure that their overall approach to regulation evolves along with advances in financial services firms, rather than holding them back. The consultation aims to understand how and when regulation might be setting up unnecessary barriers to new firms entering the market. This consultation is part of the FCA's drive to ensure it gets authorisation right - keeping out firms that are not up to scratch, and allowing the right ones through.
The paper explains the purpose of, and the FCA's approach to, authorisation, the public value it delivers and changes they are making to improve their approach. Highlighting their commitment to improving conduct standards, the FCA argue that stringent authorisation thresholds can act as a preventative tool, ensuring that the regime is effective in reducing consumer harm, and encouraging a culture in which staff take personal responsibility for their actions, and in which all staff clearly understand where that responsibility lies.
Ensuring that the right standards are achieved through firms correctly instituting, maintaining and where appropriate, improving, a solid culture of responsibility is part of the tools the FCA use to prevent harm from occurring - all regulated firms must meet common sets of minimum standards at the outset.
The consultation helpfully sets out how the FCA evaluate whether firms meet the threshold conditions. Harm in financial services is grouped into five types, which can overlap:
Confidence in markets is threatened by unacceptable conduct (market abuse or unreliable performance)
Unsuitable or mis-sold products, customer service, or treatment
Important consumer needs unmet
Prices are too high or quality too low
Risk of significant harmful side-effects on wider markets and the UK economy
In order to meet the threshold conditions, firms must:
Have its head offices, and registered office if it has one, in the UK
Have appropriate resources (people, financial and systems)
In addition, the FCA will consider:
Their ability to supervise a firm effectively; if an authorised firm is part of a wider group, the FCA must be able to understand the wider group’s impact on the specific firm
The firm’s suitability to conduct the business, and its business model. Firms should have suitably qualified people and a well thought through conduct risk framework.
The FCA use a wide range of information sources to carry out the assessment, including information provided by the firms themselves, market research and intelligence, complaints data from a range of sources, and their own experience of supervising similar firms.
Part of the consultation is seeking to understand whether firms have a clear understanding of the Threshold Conditions. As part of the consultation, the FCA are asking firms across the sector whether more transparency or information is needed in relation to the threshold conditions, the FCA's support of firms to meet the minimum standards, whether they have suggested the correct commitments to firms making authorisation applications, and whether the FCA have prioritised the right strategic goals.
If the FCA decide that a firm is not ready to meet the conditions for authorisation or registration, they will formally refuse the firm. Although the FCA have worked with applicant firms to help them work towards meeting the conditions in the past, they will now reject applications where it is clear they are inadequate. In practice, this means the FCA will undertake to offer some assistance to firms they feel are close to meeting the condition, but are more likely to refuse the applications of those that do not within the twelve-month deadline.
With this is mind, firms looking to make or finalise their applications need to ensure that they have the right information to hand to be able to provide the FCA with clear evidence that their firm meets the threshold conditions. Firms should ensure that prior to application, they have undertaken a thorough internal audit to highlight any areas which might not meet the FCA’s standards or expectations. With the suggestion that the FCA are now more likely to refuse the applications of those who do not meet the standards at the outset, this has never been more important for new firms seeking to enter the market.
Our Services set out what we can do to help you prepare for authorisation, and our library of resource downloads includes a free FCA Authorisation Guide.