FCA data clarifies pitfalls for asset management authorisations

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Getting FCA authorisation is an essential process, albeit one with many potential pitfalls along the way. The FCA’s recently published list of common errors observed from asset managers applying for authorisation or variation of permission (VoP) provides food for thought if you’re planning to file an authorisation and get it right first time.

One in five applications shown the door

Among the 310 applications from the asset management sector determined between 1 April 2023 and 1 April 2024, 73 percent were approved within eight months, while 18 percent of the applications were withdrawn due to the concerns expressed by the FCA.

A read-across to the FCA’s authorisations operating service metrics provides further context. Their metrics show successful processing of more than 98 percent of VoP applications within expected timescales, while new firm authorisations being completed with the statutory timeframe lingered between 93.9 percent to 97.4 percent.

The FCA has been known to ask firms to withdraw applications if the statutory deadline is looming, and many complex queries remain unresolved. As the FCA looks to close the gap in relation to the new firm authorisation timeline, we can expect to see requests for withdrawal occurring more frequently. Instead of allowing firms additional time to address concerns (and impacting the FCA’s metrics). If a firm refuses to withdraw an application, the application 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, such as those of professional advisers and FCA application fees.

The FCA’s key concerns

Location of offices

One of the FCA’s Threshold Conditions is the location of offices. The regulator has emphasised 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 authorised in today’s regulatory climate. However, the FCA’s latest stance has made it clearer: it is 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 clients with authorisation applications, we know that the FCA 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, the FCA mentioned it would consider 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 they expect firms to be ready, willing and organised to carry out the proposed regulated activities. Being ready and organised 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 authorisation.

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 FOS and FSCS because they will not have retail clients. It does not 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 South East, or are expanding from another jurisdiction into the UK may also find this service useful.

How we can help

Our team are experts in applying for FCA authorisation and variation of permissions, having supported hundreds of firms. We understand the FCA’s expectations and what level of detail is required in applications.

Our team can help prepare applications and assist with identifying and mitigating key risks and conflicts that may be associated with the proposed business.

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