Firms seeking to obtain a license to operate in the asset management sector in the UK must apply for authorisation with the Financial Conduct Authority (FCA). Before they apply, firms need to do a significant amount of work to identify and understand their regulatory obligations and then demonstrate to the FCA that they are capable of fully complying with those requirements.
A complete application for asset managers (or MiFID firms as they are more commonly referred to) can take anywhere from 6- 12 months to be approved if the application is considered by the FCA to be ‘complete’. However, the FCA is concerned by the number of poor applications that is receiving, which result in rejection or withdrawal.
Because of this, the FCA has released a paper setting out some of the most common reasons why applications for authorisation are rejected, or have to be withdrawn. These insights should help the asset management sector, and firms wishing to operate within the wholesale markets to improve the quality of their applications and, as a result, be able to start operating in the UK sooner.
High withdrawal rate shows the rigour of the authorisation process
The FCA’s new guidance includes an update on authorisation applications by asset management firms in the last year (1 April 2023 to 1 April 2024). 310 applications by firms were determined in that period. While most (253) were approved), 18% were withdrawn due to concerns identified by the FCA (54). A further 3 applications were rejected due to “poor-quality information”.
Making an application requires firms to invest a lot of time and resource, and this has been compounded by long backlogs for the FCA to review applications in recent years. In the last year, the regulator says 73% of applications were approved in under 8 months and 56% were determined in less than 6 months. So, if firms are rejected or advised to withdraw, they face a long wait before their next application will be reviewed.
The regulatory guidance also offers further incentive for firms to prepare thoroughly before they apply, noting that “how quickly we determine your applications is largely based on your application’s completeness and clarity”. In other words, better applications will be approved more quickly.
Common errors to avoid in applications for authorisation
The FCA has identified seven common reasons an asset management firm’s application is rejected, or needs to be withdrawn:
1. Senior management lacking experience and qualifications
A number of applicants failed because their proposed senior managers lacked the competence and expertise to undertake their designated functions, or did not hold an appropriate level of seniority in the firm. The FCA lays out its expectations about the experience and qualifications of senior management here.
2. Office locations outside the UK
Some applications have not met the FCA’s condition that “the mind and management” of a regulated firm needs to be in the UK. Firms are expected to take business decisions and oversee outsourced activities here on a day-to-day basis.
3. Business models exposing clients to risk
The regulator accepts that all business models pose risk, but warns that applicants often fail to identify what the risks are in their particular case, nor adequately consider and evidence how to remove or mitigate them. In some cases, firms had business models whose risk level was considered “unacceptably high” for the firm’s clients, particularly retail clients.
4. Outsourcing and accountability
The FCA accepts that firms will outsource certain activities to third parties, but notes that some applicants fail to appreciate that the ultimate responsibility for those activities remains with the applicant. Firms should also be accountable for ensuring the activities by outsourced firms remain compliant with the relevant rules.
5. Failing to identify conflicts of interest
An asset manager typically has a lot of control over client assets and money, which can lead to potential conflicts between the interests of the client, the firm, and related parties. The FCA has found that some applicants failed to consider this potential “adequately, or at all”. Firms are therefore advised to identify all potential conflicts of interest and set out a plan to avoid, prevent or manage them.
6. Consumer protection
Consumer protection is a major focus of the FCA, and we have previously covered the Consumer Duty’s implications for financial services firms. Asset managers sometimes seek exemption from the Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS) as part of their application and may assume that they will not be in scope of either if they don’t have retail clients. But the regulator notes that “this is not necessarily the case”, and firms should properly consider whether they’re likely to do business with a third party which is eligible under FOS or FSCS.
7. Preparedness for authorisation
The FCA expects applicants to be “ready, willing and organised” to carry out the activities outlined in their application. But it says this is not always the case with applications, and cited examples of firms failing to recruit the relevant senior management function holders, or arranging for sufficient capital to be in place.
The regulator warns that it is not willing to put applications on hold for extended periods or accept “significant changes” to the proposed model during the process. It advises applicants in this position to withdraw and reapply at a later date, which reinforces the importance of preparing thoroughly before you apply.
fscom can help asset management firms to prepare thoroughly for all aspects of the authorisation process, drawing on our extensive experience of supporting firms to make successful applications. Contact us today to discuss your company’s prepardness: please click here.
