Basic Information on FCA Requirements
An entity which sets up in the UK to carry out specific types of financial business will need to be authorised by the Financial Conduct Authority in the UK (FCA).
Pursuant to the Financial Services and Markets Act 2000 (FSMA), a firm carrying out a regulated activity in relation to a regulated investment in the UK must be authorised by the FCA and will be subject to continuing regulation by the FCA, unless an exemption applies. What these regulated activities and regulated investments are is set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
If authorisation is required, the firm will need to apply for authorisation and individuals who will be carrying out certain key roles (known as controlled functions) at authorised firms must also obtain approval from the FCA before doing so. Approval for both the firm and the individuals is commonly applied for at the same time and the authorisation process commonly takes six months or more, depending on the exact nature of the applicant and its application.
FCA Application – the basics
An FCA application requires a certain amount of preparatory work and applicants need to familiarise themselves with the FCA Handbook, which contains the rules of the FCA, particularly the Principles for Businesses (PRIN) as these are fundamental to the entire regulatory regime.
The FCA requires all applicants to demonstrate the following:
- (i) that they have adequate financial resources to meet the minimum financial requirements for their particular prudential category (PRUD);
- (ii) that they have determined the systems and controls they will need to put in place in order to support their activities and comply with relevant rules (SYSC);
- (iii) that the relevant staff are approved or will be approved to carry out controlled functions (SUP); and
- (iv) that they have determined which of their staff will require professional qualifications in order to perform their roles (TC).
The application process itself is a single process, which means that all applicants have to comply broadly with the same application requirements, but the amount of information required will, of course, depend on the nature of the business. Each applicant has to set out clearly in its application the regulated activities which it requires permission to carry on.
The application is time-consuming and quite complex and certain documents need to be supplied for an investment advisor and arranger. In addition, the applicant must include terms and conditions for clients which must be FCA-compliant as well as being commercially and legally correct. Due to its complexity, it is very common for counsel to be instructed to prepare the application pack.
Some FCA requirements
In this section we set out some of the conditions with which the FCA will require an applicant to comply. The issues touched on are by no means comprehensive and only given as guidance on a few basic requirements.
1.Personnel and staffing level requirements
All FCA-authorised firms are required to have the following controlled functions in place:
- (i) CF8: apportionment and oversight function;
- (ii) CF10: compliance function;
- (iii) CF10a: CASS operational oversight function;
- (iv) CF11: money laundering reporting function;
- (v) CF28: systems and controls function; and
- (vi) CF30: customer function (this relates to the regulated activities of giving advice on, dealing and arranging deals in and managing investments).
Under Part 5 of FSMA, an authorised firm must take reasonable care to ensure that no person performs a controlled function unless that person is approved by the FCA to do so.
A firm must generally have two CF30 personnel; however, in some very limited circumstances the FCA may permit one CF30 and one locum CF30.
The CF10 function must be carried out by personnel based in the UK at all times. Although it is common for a firm to appoint an external compliance consultant to assist them with their compliance activities, this is merely assistance and responsibility for the compliance oversight function will continue to rest with one or more of the firm’s directors or senior managers.
2. Information on the detail required by the FCA on controllers of the applicant firm
A controller of an authorised firm is a person who holds a certain level of influence over that firm, whether directly or indirectly, through ownership rights, such as shareholdings, voting rights or partnership interests. The controllers of a firm will include the firms’ ultimate beneficial owners, who may be individuals or entities with an indirect interest in the firm.
The level of ownership required for a person to be a controller varies depending on the nature of the firm, but broadly speaking, a person will be a controller if they have a 10% interest in a firm, whether directly or indirectly, or equivalent control.
Given the potential influence that controllers can have over an authorised firm, the FCA requires information about who owns or controls each firm that they regulate and further requires that each such person is suitable to act as a controller, namely is fit and proper, and will not prevent them from supervising the firm effectively.
Once a person is approved as a controller, the FCA requires a firm on an ongoing basis to notify them about significant events relating to the controller, as well as any change in control.
Each potential controller is required to submit a controller’s form as part of the FCA application, providing details of their employment background, experience and relevant qualifications. In January 2017 the FCA produced new MiFID II compliant forms which go into great detail about controllers and this rigour is also found in the new Form As which those applying to carry out controlled functions must complete.
3. An overview of the main compliance and organisational requirements with which an applicant must comply
Regulatory capital requirements, and the on-going monitoring, calculation and meeting of them, are major requirements but not the only requirements with which an FCA authorised firm must comply. The threshold conditions (“Conditions”) set out in the FCA Handbook are the minimum requirements that an FCA-authorised firm must meet to become authorised. In addition, firms must continue to meet the Conditions to remain authorised and they are a key supervisory tool for the FCA, who will assess firms against them on a continuous basis. Failure to meet them provides the basis for triggering certain powers of intervention relating to firms, including the power for the FCA to vary or cancel a firm’s permission. The Conditions are set out in Part 1 B to Schedule 6 of FSMA.
The Conditions for FCA-authorised firms which are found at the Conditions sourcebook (COND) as follows:
- (i) location of offices;
- (ii) effective supervision;
- (iii) appropriate resources;
- (iv) suitability;
- (v) business model; and
- (vi) FCA Guidance.
The below provides a brief summary of the Conditions set out in (i) to (v) above:
(i) Location of offices (COND 2.2)
In broad terms, this Condition requires a firm’s head office and its mind and management, to be in the UK if the firm is incorporated in the UK.
COND 2.2.3G states that this is not necessarily the firm’s place of incorporation or the place where its business is wholly or mainly carried on. Although the FCA will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control i.e.
- (a) the directors and other senior management, who make decisions relating to the firm’s central direction, and the material management decisions of the firm on a day-to-day basis; and
- (b) the central administrative functions of the firm (for example, central compliance and internal audit).
(ii) Effective supervision (COND 2.3)
The effective supervision Condition means that a firm must be capable of being effectively supervised by the FCA. The Condition covers all circumstances, including the nature and complexity of the firm’s regulated activities, the complexity of its products and the way in which its business is organised. COND 2.3.3G states that, in assessing the effective supervision threshold condition, factors that the FCA will consider include the following:
- (a) whether it is likely that the FCA will receive adequate information from the firm, and those persons with whom the firm has close links, to enable it to determine whether the firm is complying with the requirements and standards under the regulatory system for which the FCA is responsible and to identify and assess the impact on its statutory objectives. This will include consideration of whether the firm is ready, willing and organised to comply with PRIN 11 (a firms’ relationships with regulators) and the rules in the Supervision manual (SUP) on the provision of information to the FCA); and
- (b) whether the structure and geographical spread of the firm, the group to which it belongs and other persons with whom the firm has close links, might hinder the provision of adequate and reliable flows of information to the FCA.
(iii) Appropriate resources (COND 2.4)
Resources include both financial and non-financial resources. Paragraph 1A(2) of Schedule 6 to FSMA provides that, for the purposes of the Conditions, a firm’s “non-financial resources” include any systems, controls, plans or policies that the firm maintains, any information that the person holds and the human resources that the firm has available. COND 2.4.2G(2) states that the FCA will interpret the term “appropriate” as meaning sufficient in terms of quantity, quality and availability, and “resources” as including all financial resources, non-financial resources and means of managing its resources. For example, capital, provisions against liabilities, holdings of or access to cash and other liquid assets, human resources and effective means by which to manage risks.
(iv) Suitability (COND 2.5)
The emphasis of this Condition is on the suitability of the firm itself. The suitability of each person who performs a controlled function will be assessed by the FCA, under the approved persons regime (by completion of a Long Form A for each person). The FCA will take into consideration anything that could influence a firm’s continuing ability to satisfy this Condition. Examples include the firm’s position within a UK or international group, information provided by overseas regulators about the firm, and the firm’s plans to seek to vary its Part 4A permission to carry on additional regulated activities once it has been granted that permission (COND 2.5.2G(2)).
COND 2.5.4G(2) and COND 2.5.6G each set out examples of the kind of general considerations to which the FCA may have regard when assessing whether a firm will satisfy, and continue to satisfy this threshold condition. These include whether the firm:
- (a) conducts, or will conduct, its business with integrity and in compliance with proper standards;
- (b) has, or will have, a competent and prudent management;
- (c) can demonstrate that it conducts, or will conduct, its affairs with the exercise of due skill, care and diligence;
- (d) the firm has been open and co-operative in all its dealings with the FCA and any other regulatory body;
- (e) the firm is ready, willing and organised to comply with the relevant requirements and standards under the regulatory system;
- (f) the firm has been the subject of, connected to the subject of, any existing or previous investigation or enforcement proceedings by, among others, the FCA;
- (g) the governing body of the firm is made up of individuals with an appropriate range of skills and experience to understand, operate and manage the firm’s regulated activities;
- (h) where appropriate, the governing body of the firm includes non-executive representation at a level that is appropriate for the control of regulated activities proposed;
- (i) those persons who perform controlled functions under certain arrangements entered into by the firm or its contractors act with due skill, care and diligence in carrying out their controlled function;
- (j) the firm has developed human resources policies and procedures that are reasonably designed to ensure that it employs only individuals who are honest and committed to high standards of integrity in the conduct of their activities;
- (k) the firm has in place appropriate systems and controls against financial crime including, for example, money laundering; and
- (l) where appropriate, the firm has appointed auditors and actuaries who have sufficient experience in the areas of business to be conducted.
(v) Business Model (COND 2.7)
This Condition involves the FCA assessing whether a firm’s strategy for doing business is suitable for its regulated activities. It is intended to demonstrate the importance that the FCA places on a firm’s ability to put forward an appropriate, viable and sustainable business model that reflects the nature, scale and complexity of the business the firm intends to carry out.
COND 2.7.1(2) states that the matters which are relevant in determining whether a firm satisfies this Condition include:
- (a) whether the business model is compatible with the firm’s affairs being conducted, and continuing to be conducted, in a sound and prudent manner;
- (b) the interests of consumers; and
- (c) the integrity of the UK financial system.
COND 2.7.3 sets out the issues that firms should take into account to demonstrate to the FCA that their business model is appropriate to the regulated activities they undertake. These include:
- (a) the assumptions underlying the firm’s business model and justification for it;
- (b) the rationale for the business the firm proposes to do or continues to do, its competitive advantage, viability and the longer-term profitability of the business;
- (c) the needs of and risks to consumers;
- (d) the expectations of stakeholders (for example, shareholders and regulators);
- (e) the products and services being offered and product strategy;
- (f) the governance and controls of the firm and of any member of its group (if appropriate)
- (g) the growth strategy and any risks arising from it;
- (h) any diversification strategies;
- (i) the impact of the external macroeconomic and business environment;
- (j) how the firm intends to implement its business model, including such areas as the procurement, outsourcing and recruitment arrangements; and
- (k) sustainability e.g. the identification and mitigation of potential risks and any contingency plans.
COND 2.7.11G states that firms should ensure that any adjustments to its business model:
- (a) are approved at an appropriate level in the business;
- (b) are considered in the light of any potential risks, impacts and consequences of the proposed changes;
- (c) appropriately take into account the needs of and risks to clients and relevant consumers.
Finally, COND 2.7.12G states that the FCA’s assessment of a firm’s satisfaction of this Condition will not necessarily be limited to a firm’s regulated activities if the FCA believes the firm’s other business activities, if any, may impact on a firm’s regulated activities.
4. An overview of the on-going regulatory reporting requirements
All regulated entities are required to make on-going reports to the FCA. These fall into the following main (not comprehensive) categories:
(i) Annual accounts and reports
The FCA requires firms to send their annual accounts and reports, in line with section 262(1) of the Companies Act 1985 and section 471 of the Companies Act 2006, as laid out in the supervision processes (SUP Chapter 16.7A) of the Handbook. This is complex and firms meet their obligation by instructing an audit firm with relevant experience to prepare the accounts and reports, which are then submitted electronically
(ii) Annual controllers reporting
Most authorised firms are required to submit an annual report on their controllers in accordance with SUP 16.4 or Change in Control 5. The annual report must be made electronically and within four months of the firm’s accounting reference date
(iii) Client asset reports
Compliance by firms with the client assets regime is a regulatory priority of the FCA. The FCA has a dedicated client assets unit to supervise compliance with the Client Assets sourcebook (CASS) rules, which brings together specialist risk, supervision and policy functions. The unit was established in 2010 to address concerns relating to client money risk highlighted during the 2007/08 financial crisis, in particular that standards of compliance with CASS fell short of its expectations. The FCA takes a risk-based approach to its supervision of client assets to allow it to prioritise its efforts. This is reflected in its different approach to firms that hold smaller amounts by value of client money and safe custody assets in terms of classification and data collection.
As far as reporting is concerned, the report should provide a reasonable assurance on the client money and/or custody assets held by the firm. If the firm claims claim not to have held client money or custody assets (or are not authorised to hold client money or custody assets) the auditor should provide a limited assurance report.
The report should be prepared using the template in SUP 3 Annex 1 and cover a period of no more than 53 weeks, starting from the last report, or if it is the first one, starting from the time a client assets report was first required must be submitted within 4 months of the period end-date. It must comply with relevant auditing standards, like the Auditing Practices Board and be signed by the person in the audit firm which has primary responsibility. Auditors must prepare a separate template schedule identifying the Client Assets sourcebook (CASS) rule breaches noted during the period covered by the report. If any breaches are identified in the auditor’s report, firms are expected to provide comments on actions taken and/or mitigating factors.
(iv) Client money and assets reporting
CASS medium and large firms have to complete a Client Money and Assets Return (CMAR) each month through Gabriel, our reporting system for collecting, validating and storing regulatory data.
(v) Market data reporting
Under MiFID II, firms will need to report complete and accurate details of transactions in financial instruments. These will be in addition to EMIR reporting, an activity which most funds delegate to their prime broker (though responsibility cannot be delegated)
(vi) Remuneration data reporting
Firms may be required to submit a high earners report on an aggregated anonymised basis. This provides the FCA with information on the remuneration of all its employees with total remuneration of €1 million or more and must be provided within four months of the firm’s accounting reference date.
(vii) Remuneration data reporting
The FCA’s Dispute Resolution (DISP) rules require firms to send reports on volumes of complaints and gives a form for reporting. Reports must be made twice a year and give full details concerning complaints received from eligible complainants. These are sent to the FCA online through Gabriel.
We have taken great care to ensure the accuracy of this document. However, it is written in general terms, is for general guidance and does not constitute advice in any form. You are strongly recommended to seek specific advice before taking any action based on the information it contains.
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