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Following on from the publication of its Business Plan for 2021/22, the UK's Financial Conduct Authority (FCA) has said that it will “ensure firms start with high standards and maintain them”. This involves “a more robust gateway”, which makes it tougher for firms to become authorised than previously, with more intensive assessments and a closer scrutiny of financials and business models.
For any firm that is thinking of applying for authorisation, it will become even more important to make that application correctly and to be well-prepared, particularly as the FCA is also thinking of changing and speeding up the way in which it makes decisions (Consultation Paper 21/25). This includes decisions to refuse applications, which makes refusal more likely if an application is not up to scratch. "Forbearance at the gateway" is therefore likely to be a thing of the past.
The way we were
Since the introduction of financial services regulation in 1986, the so-called "A-Day", firms have been submitting applications to their regulators for permission to perform certain financial services. In the early days of self-regulatory organisations (SROs) such as FIMBRA, LAUTRO and the Personal Investment Authority, the numbers of applicants for authorisation were manageable.
Fast-forward to 2000 and the creation of the Financial Services Authority (FSA) as a single regulator. By then, the size of the task was really starting to grow. Further responsibilities were "given" to the FSA. It became responsible for mortgage and insurance intermediaries, payments firms, consumer credit firms, claims management companies and so on.
Over time, the regulator has seen an exponential rise in its regulated population, which now stands at 60,000 firms. All of these must have passed through the authorisation "gateway", usually without having to dot every "i" in an application and cross every "t". Essentially, as long as the applicant met the fundamentals of the threshold conditions, the FCA did not sweat about the small stuff. This allowed it to handle thousands of applications each year in accordance with the resources at its disposal: proportionality in action.
Where we are now
Fast-forward again to 2021. We now see that the FCA's authorisation teams are creaking under the weight of applications. This, moreover, is before they start to receive applications in earnest from firms in the Temporary Permissions Regime. Applications that firms submit are often sitting on the (virtual) shelf, gathering dust for months before case officers are available to start reviewing them. Perhaps this is evidence of this new "assertive" FCA in action. Indeed, it has made much of its assertive approach to assessing crypto-asset registration applications, which can be expected to be replicated in other departments.
How does it unblock its pipeline? Usually, the obvious answer is to throw money at the problem. In this case, CEO Nikhil Rathi is adding 100 people to the Authorisations Department. This is fine, but these members of staff will probably need training before they are fully effective and can make inroads into allocation times and determination times.
The FCA's relaxed approach at the gateway may have helped firms get through quickly in the past, but those days seem to have gone. The FCA now seems to have decided that it has been too lenient with applicant firms that have not been able to show it that they are "ready, willing and organised" at the point when they submit their applications.
This is fine in principle, but it does not really help new start-ups that are unable to generate income until the FCA authorises them, especially when the FCA is not going to start to assess their applications for weeks, or even months.
The FCA, therefore, seems to want to flex its muscles more strongly. It has stated: “Our standards will be higher [implicitly accepting that they have been lower] with more intensive assessment and greater scrutiny of firms’ financials and business models.”
This will, inevitably, lead to more applicants being advised that the FCA is "minded to refuse" their applications. The FCA itself has said: “We will expect [refusal/withdrawal/rejection rates] to increase initially as we make the gateway more robust.”
It is absolutely right that the FCA should refuse applications from firms that fail to demonstrate that they meet, and will continue to meet, the relevant threshold conditions. And yet...
The Authorisations Refusals Division?
The FCA’s plan to overhaul its decision-making process is slightly worrying. The independence of the Regulatory Decisions Committee (RDC) as the final arbiter of refusal decisions (although a firm does have the right to appeal against such a refusal to the Upper Tribunal) has always acted as a clear brake on the FCA behaving as though it were judge, jury and executioner.
This, however, is about to change. In CP21/25, the FCA suggests that it can take such decisions more quickly "in-house". The need for rapid decision-making is understandable if the FCA has noticed that an existing firm is harming its customers, but applicant firms are unlikely to create the same urgency.
Although it is a committee of the FCA's board, the RDC is chaired by, and composed of, industry practitioners. These people provide the FCA with an objectivity that an internal FCA committee simply cannot. The RDC does not always agree with the FCA’s recommendations, often saying that the FCA has not provided compelling evidence to support those recommendations. Perhaps the FCA wants to "de-risk" these uncomfortable judgements away.
That said, it takes at least three times the FCA resource to remove a firm’s permission once it has been authorised than if it had been refused permission in the first place. In that context, more timely decisions make sense. However, the process needs to be demonstrably fair and must allow for firms to continue to be able to make representations in their defence.
We are already seeing the FCA flexing its muscles in this regard, with case officers contesting applications for authorisation. Although the FCA expects firms to show it that they are "ready, willing and organised", it does not give a firm enough time to prepare before a case officer looks at the application. The time for determining an application that is embedded in legislation — three to six months for a complete application, 12 months for an incomplete application — would suggest that the legislators expected a fair amount of "back and forth" to take place.
Then there is the question of "grounds" for refusal. What is your evidence? What is the FCA’s "evidence"? Do you see any merit in challenging the FCA? Do you believe that you will obtain a fairer hearing if you are able to make representations to the RDC, or directly to the FCA?
The new gateway
The more robust gateway for new firms is already here and the people who operate it are already more inclined to refuse applications. CP21/25 was just the FCA's way of announcing this formally. The FCA is looking harder at applications than ever before. Applicant firms ought to provide all the information that they are required to provide on the application form, but they must also anticipate the objections of the regulators and be "ready, willing and organised" with a coherent response.
James Borley is client director at Compliancy Services Ltd in London and can be reached at james.borley@compliancy-services.co.uk.
