Any business carrying out a regulated activity in the UK must be authorised by the FCA, unless they can rely on an exclusion or are otherwise exempt. Well-prepared applications for FCA authorisation can be completed in as little as 6 months, although incomplete applications can take much longer. In this article, we will set out the essentials of FCA authorisation to ensure a successful application.
FCA applications are an involved process, and we would advise you seek legal assistance from our financial services experts at your earliest convenience.
This article covers:
- What is FCA authorisation?
- Do you need to be FCA authorised?
- Exemptions and exclusions from FCA authorisation
- How should you prepare for FCA authorisation?
- Preparing to apply to FCA for authorisation
- What are the FCA’s threshold conditions?
- How do you apply for FCA authorisation?
- Authorisation or registration?
- What is the FCA Connect system?
- Should you apply for Limited or Full Permission?
What is FCA authorisation?
The Financial Conduct Authority (FCA) regulates the conduct of all authorised financial services firms in the UK. Apart from firms regulated by the Prudential Regulation Authority (such as the biggest banks and insurers), the FCA also has responsibility for prudential regulation of UK financial services firms. The FCA’s three statutory objectives are:
- To provide an appropriate degree of protection to customers.
- To protect and enhance market integrity.
- To promote effective competition in the interests of consumers.
In pursuit of these objectives, the FCA exercises functions such as the supervision of authorised firms, making rules, giving guidance and taking enforcement action against those businesses that breach its rules.
Any entity carrying out regulated activity in the UK by way of business must be authorised by the FCA, unless an exclusion applies, or they are exempt. Once authorised, there is a yearly fee and a set of minimum standards that businesses must meet at all times. If a regulated entity fails to meet these standards, then the FCA can exercise various powers such as placing requirements on how firms can carry on their business, varying that firm’s permissions or even cancelling the authorisation entirely.
Do you need to be FCA authorised?
Generally, if you are engaged in financial services in the UK then you will likely require FCA authorisation. Under the Financial Services and Markets Act 2000 (FSMA), a person carrying out a specified activity relating to a specified instrument requires FCA authorisation, unless an exclusion applies, or they are exempt (the general prohibition). If you carry out such activities without authorisation where required, you may be committing a criminal offence under FSMA, which is punishable by up to two years imprisonment and an unlimited fine. An agreement made by, or through, an unauthorised person carrying on a regulated activity in breach of the general prohibition is unenforceable against the other contracting party without a court order.
In proceedings for an authorisation offence (i.e. breach of the general prohibition) it is a defence for the accused to show that they took all reasonable precautions and exercised all due diligence to avoid committing the offence. So, the courts would take into account whether legal advice and support from experts has been sought.
Specified activities include, but are not limited to:
- Accepting deposits
- Payment services
- Consumer credit related activities
- Insurance-related activities
- Investment activities (e.g., advising on investments, managing investments, arranging deals in investments)
- Mortgage-related activities
Specified investments include, but are not limited to:
- Electronic money
- Consumer credit and consumer hire agreements
- Contracts of insurance
- Shares
- Contracts for difference (CFDs)
- Debt instruments (bonds, notes etc.)
- Deposits
- Futures
- Pension scheme rights
If you conduct any of these specified activities for specified instruments as a business, then you will require likely FCA authorisation. If you are unsure whether your business activities require FCA authorisation, our team of experts can help you understand your regulatory obligations.
Exemptions and exclusions from FCA authorisation
FSMA, the Payment Services Regulations 2017 and the Electronic Money Regulations 2011 provide for certain exemptions from FCA authorisation for:
- Agents of payment institutions and electronic money institutions.
- Firms offering payments by instalments.
- Appointed representatives of firms that are already authorised.
- Recognised investment exchanges and clearing houses.
- Professional firms, such as solicitors, accountants or actuaries.
- Those businesses listed in an FSMA exemption order for certain regulated activities. For example, local authorities are exempt in respect of accepting deposits, and the Band of England and IMF are exempt for most activities except for carrying out contracts of insurance.
The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 also contains limited exclusions which can apply to carrying on certain activities if strict criteria are met. Where an exclusion applies and the criteria continue to be met, an activity can be carried on without the need for FCA permission.
How should you prepare for FCA authorisation?
The FCA expects firms to take regulation seriously and to plan how they will meet the FCA’s standards. At a high level, the FCA will consider whether the applicant is ‘Ready, Willing and Organised’ to comply with current rules and guidance and any rules introduced in the future.
Ready
The FCA will consider what the applicant has done when preparing to submit their application. Positive indicators include:
- Reading information on the FCA’s website.
- Making enquiries to the FCA’s contact centre.
- Seeking legal/compliance advice.
- Clearly articulating your regulatory obligations.
Willing
The FCA will also consider the willingness of the applicant to comply with the FCA’s authorisation process. Positive indicators include:
- Being open and honest in your dealings with the FCA.
- Being proactive in providing information to the FCA.
- Demonstrating efforts to understand your regulatory duties.
- Timeliness and availability of staff to deal with enquiries.
Organised
The FCA also expects applicants to have the necessary supporting documents for their applications and to have arrangements in place to comply with regulations from the day they are authorised. The FCA will consider:
- Why you applied now,
- Whether there is anything outstanding that would prevent you from carrying on the activity you applied for;
- Whether you would be able to comply with the rules if you were authorised today.
Preparing to apply to FCA for authorisation
The FCA expects applicants to carry out a certain amount of preparatory work before they even start to fill out an application form. Key issues you should consider include:
- Do you meet the FCA’s threshold conditions?
- What type of regulated activity will your business be carrying on?
- Will you be able to abide by the FCA’s high-level principles for business (PRIN)?
- Have you prepared a business plan with associated risks, budget and resources?
- Do you know which rules in the FCA Handbook will apply to your business?
- Have you determined the systems and controls necessary to support your firm’s activities?
- Do you know which people in the business require qualifications?
- Have you determined who will fall within the senior managers and certification regime (SM&CR)?
What are the FCA’s threshold conditions?
The FCA’s threshold conditions are the set of minimum requirements that a business must meet to become and remain authorised. Failing to meet the threshold conditions, will result in a firm failing to receive FCA authorisation or an existing authorisation being modified or cancelled.
The FCA’s threshold conditions relate to:
- Appropriate resources
- Business model
- Effective supervision
- Location of offices
- Suitability
Appropriate Resources
FSMA requires that businesses maintain both sufficient financial and non-financial resources for their business. These include systems, controls, plans and human resources. The FCA will also consider whether a firm maintains sufficient capital, provision against liabilities and other liquid assets for its operation.
Business Model
The business model condition involves the FCA assessing whether an entity’s strategy for doing business is suitable for its regulated activities. The FCA will consider the needs and risks to consumers, expectations of stakeholders and the products and services being offered. The FCA may also consider diversification strategies, outsourcing and recruitment arrangements.
Effective Supervision
The effective supervision threshold condition requires a firm to demonstrate that it is capable of being effectively supervised by the FCA. This includes the nature and complexity of a firm’s products and business. The FCA will consider whether the FCA has received adequate information from the firm and the people with whom the firm has close links, as well as the geographical spread of the firm. How an applicant conducts itself in being open and cooperative during the authorisation process gives the FCA an insight into whether it is capable of being effectively supervised.
Location of Offices
Generally speaking, the FCA requires that a firm’s head office and a sufficient amount of its management are based in the UK. In particular, the FCA will consider the location of the firm’s directors and senior management, as well as where the central administrative functions of the business are located and the location of those responsible for outsourced activities.
Suitability
Finally, the FCA will consider the suitability of each person who performs a senior management function within the business. However, the emphasis of this threshold condition is on the suitability of the firm itself. The FCA will consider how a firm conducts business and whether it can demonstrate skill, care and diligence in its work.
How do you apply for FCA authorisation?
The forms you need to fill in will depend on the activities you are applying for permission to carry on. You should send your completed application form and appropriate fee to the FCA. You will also be required to be proactive about providing your FCA case officer more information, clarification and/or evidence to support your application.
In some cases, you may need to meet with the FCA to discuss your plans and the FCA’s expectations in relation to your business before you submit your application.
The FCA will make a decision on a complete application within 6 months (or 3 months if you’re applying to become a payments or e-money firm). However, if your application is incomplete (which is commonplace in practice), then it can take up to 12 months for a decision to be made.
If you are successful in your application, the FCA will write to you confirming your ‘Part 4A permission’ authorisation. Your Scope of Permission notice will state which regulated activities you have permission to carry out, when your permission starts, and the requirements or limitations you have requested or the FCA has put in place.
If the FCA does not consider your application to meet the standards for authorisation, it can refuse the application. However, in practice where the FCA sees the firm has the potential to be compliant but has not yet met all the required standards, it will suggest that the applicant withdraw, with a view to re-submitting once any issues identified by the FCA have been resolved. If you fail to provide the minimum information required, the FCA may reject your application outright and your application fee will not be refunded.
Authorisation or registration?
If certain criteria are met, then firms carrying on particular activities, including specific types of payment services, only need to be registered with the FCA rather than authorised. Registered firms are subject to less scrutiny and fewer obligations than firms which need to be authorised. Whilst most payment institutions and e-money institutions must be fully authorised, those who satisfy the criteria to be either a small payment institution, or a small e-money institution, only need to be registered. A firm providing account information services may also only need to be registered rather than fully authorised.
What is the FCA Connect system?
FCA Connect is the FCA’s online system to submit applications and notifications. FCA Connect is accessible through most internet browsers.
Once you have made an application on Connect, the FCA will contact you, typically within 3 weeks, to tell you which case officer has been assigned to your application or to tell you the date by which an officer will be assigned.
When a case officer has been assigned to your application, you will receive an email notification and an alert within Connect.
Should you apply for Limited or Full Permission?
Firms carrying on regulated consumer credit activities in the UK must be authorised by the FCA. The FCA operates a two-tier supervisory scheme for the consumer credit sector consisting of:
- Tier 1: full credit authorisation regime for higher-risk consumer credit activities.
- Tier 2: limited permission regime for lower-risk consumer credit activities.
Tier 1: full credit authorisation regime
Firms whose activities are deemed to be high risk are subject to the full authorisation regime. The full authorisation regime requires that you demonstrate that you can meet all the FCA’s threshold conditions.
Higher-risk consumer credit activities include:
- Consumer credit lending
- Credit brokerage
- Credit information services
- Credit reference agency
- Debt administration
- Debt adjusting
- Debt collection
Tier 2: limited permission regime
The tier 2 limited permission regime is a lighter regulatory regime for firms conducting lower-risk consumer credit activities. These include:
- Consumer credit lending linked to the selling of goods.
- Consumer hire.
- Credit brokerage where the main business is selling goods.
- Local authorities.
- Not-for-profit debt counselling and debt adjusting.
- Not-for-profit credit information services.
Applying for limited permission involves a shorter application process and a lower application fee than applying for full permission.
