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Authorization 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.
This series has been written with these early-stage firms in mind – demystifying the authorization procedure and addressing common application mistakes, as seen first-hand by compliance consultants and co-author of this series, The Thistle Initiatives Group.
In order for an application for authorization 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:
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 authorization and appointed representative / tied agent status.
This is where an application is made directly to the FCA to become authorized or registered. With Direct Authorization, firms can expect to go through the following process:
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.
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 authorization or registration.
Direct authorization 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 authorization process.
There are a number of considerations to keep in mind when submitting an application for authorization or registration. Some do’s and don’ts include:
Discover ComplyLaunch™, our automated compliance solutions package for early stage FinTechs.Are you an early stage FinTech and need a KYC and AML solution?
Originally published June 20, 2022, updated June 20, 2022
Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
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