Getting FCA authorization is an essential process, albeit one with many potential pitfalls along the way. This list provides food for thought if you’re planning to file an authorization and get it right first time.
Among the 310 applications from the asset management sector between April 1, 2023 and April 1, 2024, 73% were approved within eight months, while 18% of the applications were withdrawn due to the concerns expressed by the FCA.
A read-across to the FCA’s authorizations operating service metrics provides further context. Its metrics show successful processing of more than 98% of variation of permission (VoP) applications within expected timescales, while new firm authorizations being completed with the statutory timeframe lingered between 93.9% to 97.4%.
If a firm refuses to withdraw an application, this is very likely to be rejected outright, followed by a 12-month waiting period before a re-application is considered.
The FCA has been known to ask firms to withdraw applications if the statutory deadline is looming, and many complex queries remain unresolved. As it looks to close the gap in relation to the new firm authorization timeline, we can expect to see requests for withdrawal occurring more frequently instead of allowing firms additional time to address concerns. If a firm refuses to withdraw an application, this is very likely to be rejected outright, followed by a 12-month waiting period before a re-application is considered.
Withdrawing an application will inevitably delay business plans, as the firm goes back to the drawing board and re-considers its application. As well as the cost to the business in terms of lost revenue from its proposed regulated activities, there may be additional costs in submitting a fresh application that are worth considering, such as professional advisers and FCA application fees.
Key FCA concerns for asset management authorizations
Location of offices
One of the FCA’s Threshold Conditions is the location of offices. The regulator has emphasized the importance of the “mind and management” of a firm being in the UK. That is, the firm’s governing body must be predominantly located in the UK and activities such as portfolio management, distribution, compliance and oversight of outsourced activities, need to take place in the UK on a day-to-day basis.
It’s probably no surprise that firms with little or no physical presence in the UK are unlikely to get authorized in today’s regulatory climate. However, the FCA’s latest stance has made it clearer: it’s no longer acceptable for firms to have their senior management adopting the “fly-in-fly-out” approach, or to maintain only compliance or administration functions in the UK.
From our own work supporting asset management clients with authorization applications, we know that the regulator is taking a far sterner approach here. Although in another piece of guidance on the FCA’s expectation for Head of compliance and MLROs published in 2022, it mentioned considering the physical location of where the applicant is based and “ideally, they will work from the firm’s principal place of business in the UK.”
Given the importance of the roles of SMF16 (compliance oversight) and SMF17 (MLRO), the individual applicant being based in the UK is more likely to be considered essential rather than ideal.
Appropriate resources
The FCA has highlighted that some of the proposed senior managers lacked the knowledge, experience, or authority within the firm to undertake the senior management function. This leads to questioning whether the applicant firm has appropriate non-financial resources to run its business.
Interviews are often conducted with the proposed senior managers, requiring them to explain how the regulatory framework applies to the proposed business and what risks or harm the business may cause to its customers or the broader market. Failing to give reasonable explanations may derail the whole application.
The FCA has reminded firms that it expects firms to be ready, willing, and organized to carry out the proposed regulated activities. Being ready and organized means the SMF holders and key operational teams should be already recruited and sufficient capital ready to be put in place by the date of authorization.
Business model
The FCA has concerns about business models that pose unacceptably high risk to clients, especially retail clients. Firms with retail exposure are unlikely to succeed with their application if they fail to demonstrate that they can fulfil their obligations under the Consumer Duty.
The FCA has also noted some firms have incorrectly sought exemptions from Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS) because they will not have retail clients. It doesn’t necessarily follow that professional clients will not have access to the FOS and / or FSCS, so a lack of understanding of the rules is a red flag to the regulator. Considerations around conflicts and oversight of outsourced arrangements are also noted as common weak areas in authorisation applications.
Getting it right first time
Second chances are unlikely once an application is submitted. There’s a clear unwillingness from the regulator for applications to be placed on hold for extended periods while firms deal with issues raised, or making significant changes to applications.
The FCA has also encouraged applicants to use their pre-application support services to discuss before submitting or re-submitting an application. This is particularly relevant to firms that are involved in high-risk activities such as “regulatory hosts” for other firms. Besides, firms that are operating outside the Southeast, or are expanding from another jurisdiction into the UK may also find this service useful.
Ronnie Kwok is a consultant in the Funds practice in London and has over 8 years’ experience in regulatory compliance. Tracy Clarke is also a consultant in the Funds team with 12 years experience working in compliance roles for small UK fund managers. Abi Reilly leads the specialist Funds practice, looking after several hundred clients on an ongoing basis.
