Permission Buster: A guide to the FCA authorization process for investment firms

For financial institutions looking to become directly authorized as investment firms by the Financial Conduct Authority (FCA), it can be difficult to know exactly which permissions are necessary to apply for. It is important to get this right, as the FCA has placed increased focus on firms maintaining only the permissions that are required for their business model. In this installment of our FCA approval series for early-stage FinTechs, the FCA authorization process is deconstructed to highlight the various permissions needed by investment firms before they start trading. 

When firms apply for FCA authorization, the regulator will deeply scrutinize the firms’ business plans and investigate whether the permissions applied for are appropriate.

The permissions investment firms hold can also have implications on the prudential category they fall into, impacting the number of capital firms are required to hold and determining whether the firm will be subject to the recently introduced Investment Firms Prudential Regime (IFPR). For example, a firm limiting its business to arranging and advising on certain investments may be categorized as Article 3 MiFID Exempt. 

Which permissions do investment firms need to apply for?

This will depend on the firm’s business model, but here are some of the common permissions investment firms need: 

Advising on investments

Advising an investor to buy or sell financial instruments (i.e. shares in a listed company) based on a consideration of their personal circumstances 

Arranging (bringing about deals in investments)

This covers arrangements that have the direct effect of concluding a transaction

Making arrangements with a view to transactions in investments

This has a broad scope – a firm may be carrying out this activity even if it is providing only part of the facilities for bringing about a transaction

Dealing in investments as agent

Instructing the buying and selling of investments on behalf of investors 

Dealing in investments as principal

Either where the firm trades using its own capital or where it stands between the buyer and seller on a matched principal basis i.e. the firm matches buy and sell orders to be carried out simultaneously

Managing investments

Managing portfolios on a discretionary basis i.e. buying and selling of investments without the client approving each transaction

Safeguarding and administering assets (without arranging)

Acting as custodian of the property – most firms would apply for the arranging permission instead (below) due to the increased regulatory obligations and scrutiny that come with holding client assets

Arranging the safeguarding and administration of assets

Arranging for another firm to act as custodian of the property  

Client Type

For each permission, firms will need to specify the client types they are seeking permission to engage. There are three distinct categories:

Retail 

The default category for any client, retail clients are afforded the highest level of protection

Professional

There are two subcategories here ‘per se professional’ (e.g. another regulated investment firm or a large corporate) or a retail client can opt up to ‘elective professional’ status if they satisfy certain criteria around their knowledge, experience, and prior investment activities

Eligible counterparty

Ordinarily financial institutions, insurers, pension funds, or governments. These clients are excluded from the majority of investor protection requirements

Applying for FCA authorization

While the FCA has recently stated that its standards are going to be increasing, this guide should help investment firms navigate the intensive assessment process.

It is important that firms are prepared for the high level of scrutiny their financial and business models will be under while applying to the FCA. A single well-intentioned but misguided statement in a business plan, or an error in any accounting forecasts, can quickly put an application on the back foot and lead to delays or even rejection.

Consistency is key when providing all the required documents. Prior to submitting the application, ensure all the information given across the business plan, the FCA forms, and the senior manager application packs are consistent with the permissions applied for. At this stage, the firm should also identify the risks (to the firm, the market, and its customers) arising from the permissions it is seeking to hold. 

FCA question rounds

After submitting the application for FCA authorization, the FCA will almost certainly have additional queries and will usually ask these across several rounds of questioning. The questions could span across multiple areas, including the business model and financials, the customer journey, systems and controls to combat financial crime, the suitability of individuals applying to be senior managers or any other aspect of the firm’s application. At this stage, firms will also need to be prepared to explain how the regulated activities will be carried on reconciling with the permissions proposed to be held. 

After questioning, the FCA will review the permission profile selected during the application. 

Are you an early stage FinTech and need a KYC and AML solution?

Set up and scale your compliance program with free access to award-winning AML and KYC tools and resources.

Discover ComplyLaunch

 

Originally published June 20, 2022, updated June 20, 2022