Top tips for a smooth FCA authorisation process

For over a decade, Newgate Compliance Limited, part of the Ocorian Group, has been assisting firms in the Wholesale Market gain FCA authorisation and providing ongoing compliance support thereafter.

The FCA recently posted on their website, Asset management: common errors when applying for authorisation | FCA, though in fact the common errors the article refers to are equally applicable to non-investment management firms, such as brokerage firm and corporate finance firms.

Haydon Thomas, Head of Regulatory Transactions at Newgate, gives his top-tips on how to successfully navigate your way through the FCA Authorisation process as smoothly and quickly as possible.

What are the key factors to consider when preparing a successful application for FCA authorisation?

1. A clear & concise regulatory business plan

FCA want to see a well thought out business plan that clearly sets out, amongst others, the background to the firm, the regulated activities it is seeking authorisation for, the types of clients or investors it provides its services to (retail/per se professional/elective professional) where clients/investors are domiciled and how they are sourced, the investment objectives and strategies employed to meet these objectives, the governance arrangements and details and roles of all other staff (i.e. does the firm have sufficient human resource in place), IT systems used, the main business risks that the firm faces ((e.g., key person risk, ongoing financial solvency not being met, inadequate systems and controls, economic factors, competitors in the market, IT systems risk) and potential/actual conflicts of interest and how these are prevented and mitigated.

A clear, well presented business plan helps to demonstrate to the FCA that the firm is ready, willing, and organised to commence regulated activities and that the firm will be managed in a sound and prudent manner in accordance with all legal and regulatory requirements.

2. Financial projections & sufficient capital

The 3-year financial projections should be commensurate with the information provided in the business plan. Some questions to consider include:

Are the revenues realistic in relation to the number of clients the firm is telling FCA it will have?

Have all the operating costs been factored in and are these reasonable?

Has the firm split out its regulated revenue from its unregulated revenue?

How soon after authorisation would the firm start generating revenue?

Applicant firms should be prepared for the FCA to challenge unrealistic revenue forecasts from month one after authorisation. This can lead to scrutiny of whether the proposed capital injection is sufficient to cover FCA requirements, potential losses, and a buffer. A common misconception is that firms only need capital to meet FCA requirements, but they must also account for any forecast losses.

3. Location of office threshold condition

The FCA's expectations extend beyond a simple UK office presence. They require the majority of Senior Management Function holders (SMFs) responsible for daily operations, as well as the Money Laundering Reporting Officer (MLRO), to be physically located in the UK. This ensures the firm's trading activities are conducted from the UK and avoids the impracticality of serving regulatory papers in a foreign jurisdiction.

4. Senior management function holders – knowledge & experience

The FCA frequently scrutinises the qualifications of applicants for the SMF16 (Compliance) and SMF17 (MLRO) roles, and may also question the experience of someone nominated for SMF3 (Executive Director) with no prior leadership experience.

A common concern is the lack of previous approval for these specific roles. However, the FCA focuses on an individual's skills and knowledge relative to the firm's size, business model complexity, and potential client/investor risk.

Here are key factors for a successful application:

• Financial services background: Does the candidate have experience at regulated firms with training in areas like Market Abuse, Anti-Bribery and Corruption, and Anti-Money Laundering?

• Relevant training: Has the person undertaken appropriate training courses in readiness for authorisation? As an example, Newgate provides a suite of online training courses to its clients which cover the above, the role and responsibilities of the compliance officer and a person’s obligations under the Senior Managers Regime just to name a few.

Some firms, particularly smaller firms, may decide to enter into a contract for services agreement with an individual to fulfil the SMF16/SMF17 roles on a part-time basis. FCA will accept this if the conflicts of interest which arise if the person holds these positions at another firm can be adequately managed and that they are able to devote sufficient time to both firms to be able to discharge their responsibilities effectively.

5. Identify conflicts of interest

A criticism from the FCA is that applicant firms do not pay sufficient regard to the conflicts of interest that their business model represents to clients, third parties and to the firm itself.

Authorised firms are expected to maintain a conflicts of interest register that identifies both actual and potential conflicts of that could arise and how these conflicts are managed. Applicant firms should be able to talk about their conflicts of interest policy and procedure in their business plan and be able to submit their conflicts of interest register to the FCA if requested to do so.

6. Consumer Duty

The Consumer Duty rules were introduced on 31st July 2023. Under the Duty, firms must act to deliver good outcomes for retail customers and aim to continuously address issues that risk causing consumer harm. 

Firms that are caught by the Duty need to explain in their business plan and supporting documents how it will meet its obligations under the Duty and not structure their business models to circumvent the Duty.

The FCA have issued useful guidance on their website ‘Consumer Duty implementation: good practice and areas for improvement’ Consumer Duty implementation: good practice and areas for improvement | FCA that we would recommend firm’s use to articulate how they will comply and meet the desired outcomes.

7. Controller forms

Applicant firms are required to complete FCA forms providing details of its corporate controllers, where applicable, and its individual controllers (i.e. the UBO’s).

With regards to corporate controllers, the form requires the controller’s accounts for the past 3 years. We often see delays in providing this information to FCA which delays the authorisation process. Therefore, it is important to make your corporate controllers aware that this information is required and the reasons why early on.

Individual controller forms are somewhat intrusive and ask for the controller to provide information as to the value of their assets and liabilities and source of revenue. For obvious reasons, there may be a reluctance on the part of an individual to provide this information. Again, it is important to make the individual aware that this information is required and the reasons why early on.

8. FCA telephone calls

Sometimes, prior to starting the review of the application, the FCA case officer may invite the Compliance Officer to attend a Teams call for an informal chat to discuss the application.

There is one very important point to note. This is not an informal chat!

The case officer could throw anything at you, so you need to be prepared. For example, if you opt-up clients to elective professional you may be asked to explain the process followed.

You will almost certainly be asked about your understanding of the Threshold Conditions, the minimum requirements that a firm must meet and always maintain to be authorised. Don’t get caught out! It is imperative that you know what the Threshold Conditions are and avoid the risk of FCA requesting the firm withdraw.

How can Newgate Compliance help with your authorisation process?

With regulations constantly evolving, having a reliable compliance partner can make a big difference. Newgate Compliance offers the expertise and resources you need to navigate these changes. With a proven track record of supporting over 200+ wholesale clients in obtaining FCA direct authorisation, our team of experienced ex-regulators can help ensure your financial modelling and authorisation processes run smoothly.

Contact our team today to learn more about how we can support your business.