12 January 2022

Authorised or registered, what are the different types of FCA authorisation?

Sectors:

Financial Services

Services:

Expansion & Improvement

When setting up a business in the financial services, fintech or insurance sectors, it’s highly likely that you’ll need to become authorised or registered with the Financial Conduct Authority (FCA). Becoming authorised by, or registered with, the FCA helps to protect your end customers, your business and the wider economy from the inevitable risks that go with providing services around money, credit, assets and financial data. But to start this FCA-authorisation process, you need to ensure you apply for the most appropriate authorisation for your business type.

Tara Mellett outlines the different kinds of FCA authorisation, and why the authorisation application process needs to be an integral part of your business planning considerations.

 

What does FCA authorisation mean – and why would my company need it?

FCA authorisation is all to do with measuring and minimising risk, protecting businesses and being totally transparent around how consumers’ assets and data etc. are handled. It’s a necessary step when you begin to think about trading, but can be a complex process with a lot of different facets to it.

At the early stages of planning your business, you need to sit down and answer a few important questions. For example:

  • What are we planning on offering as a business?
  • What are the proposed services that consumers can make use of?
  • Who will your main customers be?
  • What is the company’s geographical location – and where are your customers situated?

This all takes place at the planning stage, and you need to wait until you have the appropriate FCA authorisation in place before you can start trading. That means looking at elements like your regulated activities and where authorisations will be needed for each area of the business. It could be that, as a business, you’re taking deposits, dealing in investments or offering mortgages or insurance etc.

 

What happens if you don’t get FCA authorisation?

If you don’t apply for the relevant FCA authorisations, you’d essentially become an unregulated trader. If the FCA finds out about this (and they will), you can be fined and face some quite serious penalties for the business.

In addition, if you’re a director of the business then this unregulated trading activity could be something that results in criminal charges against you for breach of duty. In essence, you would be running the company unlawfully and not meeting your responsibilities as a director, as set out in the Companies Act 2006.

When starting out with your business idea, you should know exactly what’s required and what is mandated in your specific sector or industry. Whatever industry you are in, there will be certain regulations you have to abide by.

 

What are the different types of authorisation and how do they differ?

The actions you need to take will depend on what kind of company you are, what sectors you trade in and what kinds of authorisation will be needed.

On the whole, the main business types that will need authorisation will include:

  • Investment firms – you may be a wholesale or a retail firm – the difference concerns who your customers are and whether they’re deemed as ‘professional ’ or not. You might also be an asset management firm where you’re holding or controlling assets for your customers, or dealing in assets on their behalf.
  • Consumer credit companies – this could include lenders, brokers, in-store finance providers, credit card providers and any sorts of personal loan.
  • Payment services – this can incorporate money transfer services, e-payment services and non-bank credit card issuers etc.
  • Insurance products – including things like house insurance, car insurance or any service where consumers are taking out a policy and paying a premium.
  • Electric money and e-money – where your company would be issuing e-money.
  • Banks and banking – although banks deal in financial services, there are actually two bodies that regulate UK banking. The FCA will regulate how you treat your customers and the way your bank behaves in the market. The Prudential Regulation Authority (PRA) will regulate the risk, soundness and safety of the bank itself.
  • Benchmark administrators – benchmarks are vital to the pricing of numerous financial instruments and commercial and non-commercial contracts.
  • Crowdfunding – loan-based or investment-based crowdfunding services are regulated, while donation-based, prepayment or rewards-based services are not.
  • Cryptoassets - The FCA has confirmed that some cryptoassets such as security tokens may fall within its regulatory remit depending on how they are structured. This includes if they provide ownership rights or guarantee repayment of a specific sum of money and/or an entitlement to share in future profits. Other types of cryptoasset, such as exchange tokens (like Bitcoin and other cryptocurrencies), are not subject to financial services regulation but firms engaging in exchange or custody business in relation to such tokens will be FCA supervised in the UK for money laundering purposes.

How do you understand the inherent risk in your business?

Considering the right levels of risk is so important. You might be an asset manager and need the highest level of authorisation. You’re more than likely going to be dealing with people and their assets in this sector, so that has to be worked into your risk assessment.

Every business needs a certain level of capital adequacy. If you’re an investment company, the capital requirements are more likely to be based on risk and results the level of trading you think you’ll be doing and what that looks like. It’s a very complex calculation. Other firms will require a set level of capital, such as payment services companies. Invariably there are losses to consider, especially in startup phase, which brings the balance sheet total down and impacts on your capital adequacy requirements.

On the other hand, you might be a consumer credit firm that has a completely different level of authorisation. Here you have the options of either limited or full permissions, depending on the activity you’re carrying out.

The basis for authorisation is the same for any regulated business. You must be able to prove that you have the skills and expertise to carry out the trade you’re planning to offer. You have to meet those threshold conditions and have the evidence to show that you understand the risks and your own responsibilities as directors.

 

How can we help with the application and authorisation process?

Reviewing, analysing and choosing the correct authorisations is a very complicated process, on the whole. Each individual company is different and there’s no carbon copy template that you can apply to every business.

There will be a certain amount of overlap around the viability of the business and the background of the business and the system controls etc. You name it, the FCA will want to know about it. To complete the authorisation process correctly, you have to know what you’re doing. You could find out the category you should be in, but in terms of the FCA process, there are so many permissions to navigate. Without hands-on experience, that’s very difficult to do. That’s why working with an experienced adviser, like Haines Watts, is so vital to a successful process.

Once you submit your application, the FCA has a statutory target to process a complete application within 6 months of a complete application, or within 12 months of an incomplete application. You can’t start trading until it’s agreed, and your investors may begin to get itchy feet – which could be catastrophic.

The best option is to work closely with your advisers and to apply their knowledge and experience to the project.

For a typical client, this would involve:

  1. Having an initial chat to get the basic information about what you’re intending to do, find out what financial backing you have and understand how much you know about the actual authorisation process.
  2. Finding out if you have a formal business plan and dig down into that to see how detailed it is, how the numbers stack up and where there are risk elements to consider.
  3. Then we would quote for the project and, once you’d engaged us, we’d begin the process of streamlining the authorisation, getting all the relevant details together and starting the engagement.
  4. We’d have an in-depth meeting to establish your business model in more detail and establish exactly what permissions are going to be needed.
  5. Producing a report to outline all the permissions you will need to start trading. Gaining these permissions will take some time and will differ depending on whether you’re an investment company, payment services company or an asset management business, for example.
  6. Only once we’ve had the detailed meeting and produced the report can we then tell you exactly where you fall, and which applications will be necessary.
  7. Understanding the financials and produce forecasts, looking at the systems and controls that you intend to have in place re fraud and security etc., plus preparing/reviewing all the documentation required for the application.

The FCA wants to be satisfied that you have the expertise to run this business. Information you will be asked to provide includes everything from financial information, your business plan details of systems and controls in place for all areas and anything that demonstrates the viability of the business.

The FCA must come back to you within 6 months – it may well be a shorter timescale than that. You’ll be assigned an FCA case officer who’ll work with you to get the application ready.

 

Working with us to speed up the process

Advances in fintech technology have meant that there are a lot of brand-new entrants to the financial services market in recent years. Sometimes, with new tech companies, they are not totally aware of the FCA requirements. So fintech and e-payment firms may not be ‘in the know’ around the requirements. These companies saw the need in the market and built a model to fit that need but aren’t always fully aware of the many hoops you have to jump through.

If you’re a business that’s in this position, we’d love to hear from you so that we can widen your understanding of the FCA requirements and offer you the right assistance to get your ducks in a row when it comes to getting authorised.

At Haines Watts Slough, we’re used to dealing with these FCA processes and authorisations. We’ve worked with a wide range of different regulated businesses, so we know the right questions to ask and can quickly get the deep understanding we need about your business.

If you’re setting up any kind of business that falls under the FCA umbrella, you have to think about authorisation and factor this into your business plan and timings. Talking to us early is vital if you want to deliver the best application for authorisation and get your business idea up and running as quickly as possible.

 

Talk to one of our advisers about getting FCA authorisation.

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