Posted: 2nd February 2018
The number of firms that the FCA is required to authorise and regulate has increased significantly over the last few years. The regulator now has over 56,000 authorised firms, ranging from large banks to single independent financial advisers. These also include dual regulated firms such as banks, credit unions, building societies, insurers and large investment firms.
In 2016 / 2017, the FCA received almost 73,000 applications. This is a combination of firms seeking new FCA authorisation and existing regulated financial services firms (already providing financial services) that wanted to vary their permissions or appoint new individuals.
The FCA recently published ‘Our Approach to Authorisation’, a paper detailing the purpose and importance of the authorisation process and how it is used as a tool to prevent harm.
In a bid to be more open and transparent, the paper aims to provide a clear understanding of the threshold conditions employed. It also details improvements to the support available to firms and its strategy to encourage competition and innovation within financial services.
The FCA has recognised in its document that it does not operate a ‘zero-failure’ regime. It understands that inevitably firms will fail, but expects that if this should happen, they leave the market in an orderly fashion with little or no harm to consumers. As such, firms are required to identify the risk they pose and employ adequate tools to mitigate these risks.
The importance of authorisation
Authorisation is one of the key tools used by the FCA to regulate financial services. It aims to efficiently identify and mitigate harm and incorporates the four stages detailed below to achieve this:
- Identify current/potential harm
- Diagnose the cause, extent and potential development of harm
- Assess all remedy tools, decide which can resolve or mitigate harm cost effectively
- Evaluate the effectiveness of harm
The threshold conditions are the main regulatory tool used to achieve this. These set out the minimum standard that firms and its individuals need to satisfy in order to be granted authorisation.
Following this, the authorised firm/individual is published online on the financial services register and is also expected to maintain these standards, or risk losing permissions.
How firms are evaluated against the Threshold Conditions (COND)
Judgements are made based on facts, and as such each application is assessed on a case by case basis as some may be more complex than others. In doing so, the FCA considers the following factors.
- Location of offices – the firm’s head office must be located in the UK, however, it considers the location of the firm’s directors as opposed to the location of the office as stated on Companies House
- Appropriate resources - this includes capital adequacy requirements, for example, as well as skilled individuals
- Ability for firms to be supervised effectively – in particular, the complexity of business structures and how this will impact the authorised business
- Conduct – this relates to the fitness and propriety of the firm and its individuals to perform the activities for which they seek authorisation
- Business model – this refers to how the firm makes its money and future business strategy
In addition to information provided, the regulator will also use a range of additional information, including:
- Existing information held
- Market research and intelligence
- FCA contact centre information, complaints data and FOS data
- Experience supervising similar firms
- Specific information held on the firm or individual (which would include previous judgements)
Senior Managers and Certification Regime (SM&CR) and Authorisation
The three core messages of the new accountability regime are:
- Ensuring that senior managers are fully accountable, and decisions made are fully auditable
- Making sure firms have certified as fit and proper those individuals who represent a risk to customers
- Compliance with the Conduct Rules which set out expected behaviours of professional staff
The latest SM&CR consultation (CP17 / 25) details the FCA’s approach to extending the SM&CR regime to all FCA firms, including firms that are applying for authorisation or are newly authorised.
Fostering effective competition and promoting innovation
Promoting competition and innovation is at the heart of the FCA’s agenda and this is again outlined within the FCA’s latest publication.
There are limitations on the type of support the FCA can provide firms; it has a range of existing initiatives to support firms and individuals to understand and meet the minimum conditions. With this in mind, the regulator provides a range of support to firms, for example:
- New Bank Start-Up Unit – encourages new entrants into the banking market, by explaining regulatory requirements and providing assistance
- The Advice Unit - provides regulatory feedback to firms developing automated models to deliver lower cost advice and guidance to consumers
- Regulatory Sandbox – designed to support new entrants and fintech firms to meet regulatory expectations, and encourage competition and innovation
Refusals and cancellations
The FCA outlines how they will refuse applications where firms have failed to meet the minimum thresholds. The firm or individual will first receive a ‘minded to refuse’ letter stating the reasons why the case officer is considering refusal. In most cases the firm / individual will withdraw its application at this stage.
The Regulatory Transactions Committee (independent of the Application Assessment Team) makes the decision on any refusal / cancellations.
Firms and individuals can challenge decisions made against them by providing more evidence or at an interview. Challenges can be made to the Regulatory Decisions Committee (independent committee that operates separately to the regulator).
If they decide the refusal stands, the applicant can refer the case to the upper-tribunal in order to fully exhausts the appeals process.
REGULATORY NEXT STEPS
The FCA have made it clear that they wish to understand how and when regulation can provide unnecessary barriers to new firms entering the market. In the FCA’s ‘our approach to authorisation,’ the regulator explains the purpose of, and their approach to, authorisation; the public value it delivers; and changes the regulator is considering in their approach to authorisation.
The FCA are seeking views on a number of questions about their approach to authorisation and are looking, in particular, to find out if they are being clear with their approach and what they could be doing better. The regulator has asked for any comments to be received by the 12th March 2018.