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Understanding the FCA’s Threshold Conditions – ComplyAdvantage blog series

June 22, 2022

Authorisation from the Financial Conduct Authority (FCA) is the most crucial step for early-stage financial services firms, as it gives them a license to operate in the UK.

Sometimes taking over a year to complete, for FinTech startups it can be hard to identify best practices in the approval process, and to understand what documentation they’ll be expected to provide.

We’ve partnered with ComplyAdvantage to co-author this series with early-stage firms in mind – demystifying the authorisation procedure and addressing common application mistakes, as seen first-hand.

In order for an application for authorisation or registration to be successful, firms must ensure that they meet the FCA’s Threshold Conditions. Central to this is the FCA’s requirement that firms be “ready, willing and organized”.

The FCA’s Threshold Conditions can effectively be summed up as:

  • Location of offices: Is the firm and its senior management/decision-making function based in the UK and, if there are overseas influences or involvement, how do these impact the firm?
  • Supervision: Can the firm be effectively supervised by the FCA as part of meeting its own statutory obligations? The firm will need to demonstrate how it can effectively meet and report on its obligations while maintaining open and competent communication with the FCA.
  • Resources: The firm will need to demonstrate that it has appropriate resources in place in order to meet its regulatory obligations with the resources it currently has in place. This includes both financial and non-financial resources.
  • Management: Is the senior management team appropriately skilled and able to run the business, and is it of a good professional, personal, and financial standing in order to discharge its obligations under the regulatory regime?
  • Business model: Have the firm’s business model, structure, and products been established with the customer in mind, and do they risk impacting the FCA’s statutory objectives?

Application Process

Provided firms are able to meet the FCA’s Threshold Conditions and are “ready, willing, and organized”, applicant firms have two possible options available to them: direct authorisation and appointed representative / tied agent status.

Direct Authorisation

This is where an application is made directly to the FCA to become authorized or registered. With Direct Authorisation, firms can expect to go through the following process:

1.Preparation: Firms will need to compile and collate the required information and documentation in order to submit the application to the FCA. Among other things, this may include:

    • A regulatory business plan;
    • Financial forecasts;
    • Compliance monitoring program;
    • Senior Managers and Certification Regime documentation; and
    • Controller and ultimate beneficial owner information.

Additional firm-specific documentation is also likely to be required as part of the submission. For example, if the firm is looking to become a credit lender, then it will need to have in place a detailed underwriting policy with accompanying procedures.

  1. Draft and submission: Once the firm’s information and documentation are ready to submit, the application form must be completed through the FCA’s Connect portal. After the form and supporting documentation has been uploaded, the FCA Connect portal will ask for the application declarations to be signed by the applicant firm’s director(s) and for the application fee to be paid before final submission. Once the application has been submitted, an automatic confirmation email will be sent from the FCA Connect system that includes an FCA application reference number. This reference number should be quoted in any future correspondence with the FCA.
  2. Case handler and FCA questions: The application will be assigned to a case handler at the FCA who will be the main point of contact throughout the application process. Once the case handler has been appointed and has undertaken an initial review of the application, they are likely to get in touch via email for further information and/or documentation. The volume of questioning is largely based on the quality of the application, the documentation provided, the individuals within the firm, and its business model. Some more complex or inadequately presented applications will lead to further telephone or in-person discussions with the FCA.
  3. Determination: Once the case handler is confident that the application is “complete” (meaning they have all relevant information and clarifications), it is circulated internally for a decision. After this process, firms can expect to receive one of four results: ‘approved’, ‘minded to approve’ (meaning approval is subject to something being executed), a prompt to withdraw the application at this time, or ‘minded to reject’.

Timeframes for applications will differ depending on the quality of the application, the business model, the customer base, compliance with the Threshold Conditions, and whether the application is for authorisation or registration.

Appointed Representatives

Direct authorisation can be a lengthy process – in some instances, it can take more than 12 months. Therefore, some applicants establish an Appointed Representative (AR) arrangement with a Principal firm (also known as “umbrella services”, “regulatory hosting”, or “networks”). This enables firms to bring their proposition to market sooner, typically within 3 months.

In this case, the AR undertakes its regulated activities by utilizing the permissions of a directly authorized Principal firm and is listed on the FCA register as an AR of the Principal.

Although this may be a viable and quicker route to market, the scope of the AR’s potential activities will be reduced. ARs can expect their regulated activities to be robustly monitored and enforced by their Principal.

It’s important to keep in mind that the Principal firm holds the ultimate regulatory responsibility and thus is liable for all of the risk inherent in the AR’s activities. This means that if an AR breaches any FCA rules, the FCA may pursue the Principal firm. Given Principal firms generally have several ARs, any significant rule breach would pose a potential risk to all other ARs trading under the Principal. Therefore, when ARs are being onboarded, they should expect to undergo robust due diligence not dissimilar to that required as part of the direct authorisation process.

Do’s and Don’ts

There are a number of considerations to keep in mind when submitting an application for authorisation or registration. Some do’s and don’ts include:

Do’s

  • Ensure all of the FCA’s questions have been answered comprehensively and all relevant documentation has been supplied
  • Ensure the business model has been appropriately mapped out against relevant legislation and regulatory requirements
  • Ensure all the information provided to the FCA aligns – for example, financial forecasts and customer acquisition costs
  • Ensure that individuals have been appropriately skilled internally
  • Ensure all documentation/information compiled for the FCA is open and honest

Don’ts

  • Submit an application that has not been fully prepared and is not mapped against the relevant FCA requirements
  • Submit an application that explains material information or documentation will be provided at a later date post-submission
  • Submit an application that does not include all names and relevant supporting documentation for all senior managers, directors, and key individuals
  • Submit an application without having in place a comprehensive IT road map, with something tangible ready for the case handler to undertake an initial review (such as wireframes or a demonstrable customer journey)
  • Submit an application if the required funding to cover at least the first year of trading is not, or will not, be in place, with evidence of further capital being sought for years 2 and 3 post-authorisation

About ComplyAdvantage

ComplyAdvantage is the financial industry’s leading source of AI-driven financial crime risk data and detection technology. ComplyAdvantage’s mission is to neutralize the risk of money laundering, terrorist financing, corruption, and other financial crime. More than 500 enterprises in 75 countries rely on ComplyAdvantage to understand the risk of who they’re doing business with through the world’s only global, real-time database of people and companies. The company actively identifies tens of thousands of risk events from millions of structured and unstructured data points every single day.

ComplyAdvantage has four global hubs located in New York, London, Singapore and Cluj-Napoca and is backed by Goldman Sachs, Ontario Teachers’, Index Ventures and Balderton Capital. Learn more at complyadvantage.com

How can we help you?

We are an award-winning compliance consultancy that provides financial services firms with expert compliance resources and capabilities to manage projects across all regulatory areas. For more information about our services and how we can help, contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.