Over the past 12 months we’ve seen a huge number of enquiries about applying to the Financial Conduct Authority (FCA) for direct authorisation. Historically, this type of enquiry has mostly come from well-established firms, disenchanted with their networks and seeking greater control over their business and the experience they provide to their clients. But recently, more employed individuals are reaching out, having become disenfranchised with their employer – a common consequence of market consolidation – and wanting to build a venture of their own.
The application process is rigorous, and frustratingly it can take the FCA up to six months to decide whether to authorise a firm, and even longer if an application is incomplete, so preparation is essential to avoid any unnecessary delays.
To help achieve authorisation as fast and as smoothly as possible, here are five things you should consider thoroughly before applying to the FCA.
1. If you’re an already established firm, do you need to create a new legal entity for your business before applying to the FCA?
In many cases, prior to applying to the FCA for direct authorisation (DA), applicants choose to establish a new legal entity for their directly regulated business, often because their current business is being run as a sole trader or partnership, and they believe that the interests of the principals and the business are better served operating as either an ‘LLP’ or ‘limited’ company.
It’s necessary to make this decision before applying to the regulator as late changes will require a new application, and additional costs.
Taking legal or accountancy advice is recommended before changing the legal status of your current business. You’ll need to consider the capital adequacy requirements as part of this too.
2. Do you understand what’s required to operate a profitable and compliant directly authorised business?
Don’t take the decision to apply for direct authorisation lightly. You must fully consider the pros and cons. Only those who fully understand the regulatory risk and have the appetite and capabilities to manage it for themselves should consider going directly authorised.
We recommend that you discuss your situation with a compliance expert. A good compliance support provider will be able to answer all your questions and put you in touch with firms that have undergone a similar process – it’s likely that you’re going to need support and reassurance along the way.
3. Do you have the financial resources to meet the regulator’s capital adequacy requirements?
Currently, small personal investment firms are required to have a minimum of £20,000 (or 5% of relevant income, if higher) capital at all times.
For firms that arrange mortgages and insurance, and do not hold client money, the minimum capital requirement is the higher of £5,000 or 2.5% of annual mortgage and insurance income.
It is worth reiterating that the necessary level of regulatory capital needs to be maintained at all times, not purely at the point of application or subsequent periodic financial reporting. Also the figures discussed here are the bare minimum requirements. The FCA will expect to see additional capital held to enhance the resilience of your firm.
4. How much are the additional regulatory fees and levies?
In addition to an application fee of £1,500, all firms must pay annual levies to the FCA, the Financial Ombudsman Services and the Financial Services Compensation Scheme. These levies are now related to turnover in the various product categories.
Here are two examples using the current fee tariff:
- A firm with annual income of £50,000 for non-investment insurance, £50,000 Life and Pensions and £50,000 Investment income would pay approximately £4,800 annual – around 3.2% of its turnover
- A firm with annual income of £50,000 for non-investment insurance, the same for mortgage business and £200,000 for life/pensions/investment income, would pay approximately £7,900 – around 2.6% of its turnover
A very useful a fee calculator is available on the FCA website if you need more information.
Personal investment firms also require professional indemnity insurance, unless the firm is part of a large group and is covered by the group’s policy. The cost of the cover will depend on the firm’s intended activities and its expected turnover. A very rough estimate would be approximately 2.5% of turnover.
5. What additional information will you need to provide to support your application?
Applying for direct authorisation isn’t just about completing the FCA’s online application. Part of the process requires you to provide significant amounts of further information, including some, or all, of the following:
- A staff organisation chart
- Information on senior manager competence and experience
- A business plan
- Your compliance monitoring procedures
- Details of your professional advisers
- Detailed financial projections
- A professional indemnity insurance quotation
The necessary documents will vary, but they should be prepared before submitting your application. You will also need your accountant’s guidance in preparing the required financial projections.
In summary, direct authorisation isn’t as difficult as many would have you believe, but it won’t suit every firm or individual. The process of obtaining authorisation from the FCA can be painstaking if you’re not prepared. If you’ve decided to go down the DA route, make sure you’ve done your homework, and ensure your application is completed thoroughly to avoid any unnecessary delay.
Barry Martin is head of advisory sales at Threesixty
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