Most financial service providers and consumer credit firms must be authorised by the Financial Conduct Authority in order to operate and in 2019 these firms will be joined by Claims Management Companies when the regulator switches from the Claims Management Regulator to the FCA in April. Inwardly passported firms should also ensure that they are properly authorised before Brexit. The good news is that the time taken to process authorisation applications has fallen from an average of 14 weeks to just 10 weeks within the past six months.
Regardless of the potential for a faster turnaround, the process can be overwhelming, especially for new or smaller firms. The application itself demands significant amounts of time and documentation, never mind the burden of a new regulatory framework that includes not only a considerable set of rules but also brings with it a set of expectations for the firm’s culture, plus a new Regime for approved individuals that even older firms are having to get to grips with.
To help firms determine their path to authorisation, we have outlined our five key steps. If your firm needs to consider getting authorised, download our free FCA Application Guide.
Step 1 – establish permission
If the business of the firm involves a regulated activity, then the likelihood is the firm will need to be authorised. Firms need to be clear on which of its activities are regulated. If there are any doubts, then the FCA’s perimeter guidance (PERG) sets out when authorisation is required for certain activities, however, we advise firms to seek expert advice if they are unsure.
But what permission will your firm need to apply for? Some firms will only need to apply for Limited Permission, such as credit brokers who work solely with consumer hire agreements, and not-for-profit bodies providing debt counselling. Read our post about the differences between Limited and Full Permission for more information. If there is any further confusion, then the FCA’s decision making tool can help – in some cases this can be a complicated process and firms should seek expert advice if unsure. If you apply for the wrong permission category, the authorisation application will be delayed.
You will also need to consider costs, including application costs, any costs arising from the use of a consultant or expert advice, and regulatory capital costs – the amount that the FCA require firms to carry (minimum amount of capital).
Step 2 – strategy and audit
At this stage, once the firm is sure which permission it needs and for which activity, you can start to consider the main issues: how will being regulated affect costs and capital; how will compliance with the rules affect the firm; which individual staff will need to be approved in the appropriate Approved Persons Regime - new applicants should check whether the Approved Persons Regime or the Senior Managers and Certification Regime will apply to them.
To assist, firms can consider completing a gap analysis exercise, against the FCA’s Threshold Conditions – the minimum conditions a firm needs to meet in order to be given authorisation. Firms need to continue to meet the Threshold Conditions in order to keep their authorisation. In short, these are:
Head office located in the UK – this must be the office in which the firm’s directors and other senior management, plus the main administrative functions are based.
Effective supervision – the firm must be capable of being supervised by the FCA, with no group memberships or close links with others that could prevent effective supervision.
Appropriate resources – the firm must have sufficient financial and non-financial resources to be able to carry on the regulated activity.
Suitability – the firm must be fit and proper, given the nature of the business, and complies with the requirements imposed by the FCA. Directors, senior managers and others who manage the firm’s affairs must have adequate skills and experience and conduct the affairs of the business in a sound and prudent manner.
Business model – The way the firm conducts its business must be suitable for the regulated activities it carries on, including acting in the interests of consumers and with regard to the integrity of the UK financial system.
Analysis should also consider any applicable parts of the Handbook, to gauge how compliant the current conduct of the business is. All firms will need to measure conduct against the high-level standards and SUP and DISP; investment firms, insurers and banks and building societies will need to consider the relevant Prudential Standards and Business Standards Sourcebooks. Those conducting certain regulated activities will also need to consider whether the Specialist sourcebooks apply to them; for example, CONC applies to consumer credit firms.
The firm will then be well placed to begin to amend practices and policy and procedure documentation, which should, in turn, assist with the regulatory business plan.
Step 3 – Gather documentation
Although some of the documentation won’t need to be submitted immediately to the FCA, the firm needs to confirm that the required documentation is available should the FCA ask to see it, so it is vital that all relevant business documents are finalised and ready for the regulator.
There are a number of document types that the FCA will ask to see to evaluate their compliance with the Handbook. For example, consumer credit firms will likely need to supply draft agreements, pre-contract information, and promotional literature, which must comply with the relevant provisions in the Consumer Credit Sourcebook – this is why the gap analysis is so important.
This step also includes a range of information for any individuals in FCA approved roles, including National Insurance or passport number, their employment history, residential addresses and details of significant events, which includes solvency, criminal and civil investigations and proceedings, convictions for fraud etc, plus complaints data.
The Regulatory Business Plan is where much of the legwork lies. This individual document will tell the FCA most of what it needs to know about the way the firm conducts business and they use the Plan to measure business risk and control over any regulatory concerns. It must cover services, outsourcing, fair treatment of customers, permissions, financial resources, personnel including those in approved roles, and compliance arrangements. In short, the plan must convince the FCA that the firm can identify all the activities it intends to carry out, whether these are regulated or unregulated, identify business and regulatory risk factors, and explain how it will monitor and control these risks. The complexity of the plan should mirror the nature of the business – if the firm is small and carries low risk, the FCA would expect to see a proportionate regulatory business plan, which may need to contain less or different information from a larger or higher risk business.
Step 4 - Work through application
Once all of the preparatory exercises are complete and information has been gathered, you can set up the application. To do this, new firms will need to register to use the FCA’s CONNECT system and create a new application. The CONNECT system is for use by firms to submit applications and notifications. Following authorisation, firms will also need to use the Gabriel system to send regulatory data.
Firms will need to answer questions or submit information on permission type, regulatory fees, the business plans, personnel information, plus information on systems and controls and the firm’s business continuity plan, and confirm compliance procedures are in place, and provide copies or overviews as requested of the compliance monitoring programme and financial crime measures. Finally, the application also requires the submission of information on owners and influencers and corporate partners or controllers.
Step 5 – declare and submit
Finally, firms must sign the declaration that the application is accurate and complete, and tick a box to confirm that a permanent, signed copy of the application will be retained for inspection. The application should be submitted, and the required application fee paid. The FCA state that it takes between two to six months for an application to be allocated, and as a target they try to complete authorisations within six months where the application is complete, and within 12 in the case of incomplete applications.
Following submission, the firm will need to work with their case officer to answer any queries. In our experience, firms can best use this time to embed compliance and a culture of accountability and responsibility.
If you have any questions about the application process, Contact Us.