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What has happened?

In April 2024, the FCA listed and reported on some common issues experienced with recent asset management firm authorisation applications. This is a non-exhaustive list of areas of concern that have reduced firms’ chances of success or have caused delays when authorisation applications are determined.

What are the key application failings the FCA has commented on?

Before they apply for authorisation, the FCA recommends that firms wishing to operate in the asset management sector should consider the points set out below.

Between 1 April 2023 and 1 April 2024, the FCA determined 310 applications from firms seeking to operate in the asset management sector. On average, 73% of these were approved in under eight months and 56% were determined in less than six months.

How quickly the FCA determines applications is largely based on their completeness and clarity. As a guide, between April 2023 and April 2024, 18% of applications submitted were withdrawn due to the concerns set out below or were rejected by the FCA as they contained poor quality information. The following table showing this was supplied by the FCA.

The FCA suggests a number of common errors to avoid in applications.

First, members of senior management who are lacking experience or qualifications. A number of applicants failed to meet the FCA’s expectations in relation to their senior management arrangements. This was typically due to the proposed senior managers either:

• lacking the competence and expertise to undertake the functions for which they had applied, or
• not holding an appropriate level of seniority in the firm

The FCA emphasises that it has received applications from proposed SMF holders who have not held roles requiring similar prior experience, or who lack relevant/suitable qualifications. When the proposed applicants were questioned, they were unable to explain in sufficient detail the regulatory framework that applies to their business or how their proposed business model would work.

Second, office locations outside the UK. Sometimes firms appear to misunderstand the ‘Location of Offices’ threshold condition (see COND 2.2). The FCA expects the mind and management of a firm to be in the UK, taking business decisions about portfolios and distribution and effectively overseeing outsourced activities in the UK on a day-to-day basis. The FCA emphasises that it is not enough for a firm simply to base its compliance or administration in the UK, or to have the people who make business decisions fly in from time to time.

Third, business models that expose clients to risk. While the FCA accepts that all business models pose risk, often applicants do not identify the risks that their business model poses or adequately consider and evidence how they might remove or mitigate those risks.

Some applicants have approached the FCA with business models considered to pose an unacceptably high level of risk to the firm’s clients and, in particular, to retail clients. Where a firm is engaging with retail clients, the FCA emphasises that it will expect it to demonstrate how it applies the Consumer Duty. Applicants that cannot do so adequately are unlikely to be successful.

Fourth, outsourcing that underestimates the firm’s accountability. In some applications firms have not considered the relevant rules, the applicant’s responsibilities, and the impact on their business when outsourcing.

Applicants sometimes fail to appreciate that, despite activities being outsourced, responsibility and oversight for those activities will sit with the applicant, who will also be accountable for ensuring compliance with the relevant rules.

Fifth, conflicts of interest where concerns are not identified. Some applicants fail to consider potential conflicts of interest adequately, or at all, in their applications.  

Before applying for authorisation, an asset manager should carefully consider the rules that will apply to its business. For example, these may require it to identify all potential conflicts of interest and have a plan for avoiding, preventing or managing them.

Sixth, attempting to avoid redress schemes that protect consumers. Some asset managers seek exemption from the Financial Ombudsman Service and the Financial Services Compensation Scheme when this is not appropriate. This can increase how long it takes to conclude the FCA’s assessment. For example, firms sometimes assume that if they have no retail clients, they will not be in scope of the FOS or the FSCS. This is not necessarily the case, however.

Seventh, being unready, unwilling or unorganised  The FCA expect applicants to be ready, willing and organised to carry out the activities they plan to undertake – see FCA guidance for details. It has seen examples of firms that have submitted applications when they were not ready, willing and organised; for instance, because they had not recruited the relevant SMF holders or arranged for sufficient capital to be in place.

While the FCA understands that circumstances can change during the lifecycle of an application, it has emphasised that it is not willing to put applications on hold for extended periods or to accept significant changes to the proposed model (for example, changes in the target market). If there are significant changes to a proposed application, the firm should consider withdrawing the application and re-applying at a later date. This is better than proceeding with a poor-quality application that does not meet the FCA’s standards.

How can we help you?

Thistle Initiatives has supported asset management firms for over 10 years as a trusted compliance and regulatory adviser. In addition to assisting you as-and-when, our team of specialists can serve as your right hand in meeting and complying with FCA regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Are you looking for help with your FCA authorisation application, or more general regulatory questions? If so, we can help in any of the following ways;

• Drafting or reviewing your FCA authorisation application (three different service levels are available)
• Advising on the capital requirements and ICARA requirement applicable to your firm
• Advising on Appointed Representative applications
• Advising on Variation of Permissions applications
• Advising on Senior Manager applications
• Drafting or reviewing your compliance monitoring programme

We have supported 1000+ firms to pre-empt the pitfalls and get their application right with our expert FCA authorisation service.

Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.

See also our authorisations FAQ web page at: https://www.thistleinitiatives.co.uk/fca-faq.