In times of increasing scrutiny, the Financial Conduct Authority (FCA) continues to remind firms of its powers and intent to ensure that only firms conducting regulated activities remain authorised. Following changes made by the Financial Service Act 2021, the FCA began to more closely monitor the regulated activities undertaken by the firms it regulates. Where it has concerns that a firm has permissions that they are not using, the FCA will formally write to the business in question, inviting them to relinquish the permissions they are not using and/or not intending to use in the next 3 months or provide strong evidence of how the firm is attempting to conduct regulated activity. The invitation to remove is the step before the FCA uses its powers to remove through enforcement. This not only means the firm can’t pursue future regulated business, but if in the future, the firm wanted to be authorised, then it becomes a challenge when applying to be authorised again.
Why is the regulator doing this?
The reasoning behind this initiative relates to concerns raised that some firms are authorised only for the perceived kudos/credibility that comes along with being “approved” by the FCA, which could mislead consumers. This, in turn, could lead to consumer harm and as such, supports the FCA in its operational objective to protect consumers. It’s not all bad news though, there are other benefits for firms that can come from continuing to assess their permissions. As an example, where a firm no longer uses some of its permissions, removing these permissions may remove a firm from a fee block, subsequently reducing its annual fees.
Despite its potential for positive change, it is worth noting a few further sector developments which might contradict this ‘use it or lose it’ initiative and it is for firms to decide how best to approach.
Firstly, when referring specifically to the commercial broker market, many brokers only hold permissions in case they deal with sole traders/small partnerships which might fall within the regulatory perimeter or find themselves sourcing personal finance products for directors of limited companies. In addition, many of the funders in this sector require brokers to be authorised to be accepted onto panel even for non-regulated business.
Secondly, further contradictions present themselves as a result of changes made in Google policy to require all those making financial promotions for lending and more recently debt services to be authorised. The unintended consequence of this measure, which was implemented with all good intentions, is that brokers wishing to advertise solely non-regulated business-to-business finance are now being captured by the need for Google verification, which requires a firm to be authorised or have their financial promotions approved by an authorised firm.
- Thirdly, when referring specifically to Alternative Investment Fund Managers, many UK AIFMs (hedge and private markets managers) hold the Collective Portfolio Investment Management (“CPMI”) designation as opposed to acting as a Collective Portfolio Management (“CPM”) firm. The wider status allows firms to manage segregated and sub-delegated portfolios alongside their unauthorised AIFs through the so-called MiFID “top-up” permissions. To date, the FCA has appeared relaxed about firms retaining CPMI status for a while even when not using the MiFID permission (and, being wholesale firms, they don’t appear to threaten the FCA’s core objectives). However, this could change at some point so firms should at least have a narrative prepared that supports why the CPMI status is preferred.
The FCA has been looking for low-hanging fruit, namely, firms that are late with reporting through Regdata or those not completing the required attestations relating to the firm details and directory of persons. The regulator will also consider late or non-payment of FCA fees as another reason to look more closely at a firm’s activity. That said, this has progressed into engaging with firms solely submitting nil returns within their sales data regarding regulatory income.
In our opinion, the message is clear from the FCA, if you believe that your firm is unlikely to use its permissions in the next 12 months and/or has not used them in the last 12 months, you should either remove your permissions or start thinking swiftly about how to use them.