EEA firms in the TPR: Navigating FCA authorisation and what it means to be FCA-regulated
By Martin Lovick, ACA Group
Published: 20 September 2021
In the run-up to the UK leaving the European Union, the UK’s FCA introduced the Temporary Permissions Regime (TPR) for European Economic Area (EEA) firms that had previously been allowed to offer their investment services in the UK under the passporting regime, without the need for FCA authorisation. Firms who signed up to the TPR may continue to offer these services for a temporary period, pending the FCA inviting them to apply for full authorisation (known as a landing slot).
Getting a landing slot
Firms in the TPR are now starting to be contacted by the FCA on the timing of their landing slot, typically (but not always) with a few months warning to prepare their applications. These correspond to a quarter of the year starting in Q3 (July – September 2021), with the last slot expected to be October – December 2022.
The FCA has confirmed that landing slots can, in theory at least, be altered by written request and explanation. However, it is apparent that this will be offered only in exceptional circumstances. Firms are warned that not submitting their applications by the closing date will likely lose their temporary permissions. Their only recourse at that point would be to submit a fresh FCA application and they would not be permitted to carry out new regulated activity in the meantime.
It is worth pointing out to firms who missed joining TPR still have the option of applying for FCA authorisation afresh – however, they will be unable to carry out a regulated activity in the UK until authorised.
The FCA authorisation process
One point to underline is that FCA authorisation for firms in the TPR has not been expedited in any way. EEA firms who may have been doing business in the UK through the passporting route for many years may find it odd that they are now effectively back to square one.
It also cannot be emphasised enough that FCA authorisation, also referred to as Part 4a Permission, is not a straightforward process. There may be strategic and commercial considerations about the legal form and governance structure of the UK entity to consider, as well as a number of bespoke documents such as a business plan and detailed financial forecasts to start drafting. Planning and preparation of these requirements will facilitate the process considerably.
The FCA assesses applicant firms, and their intended business activities, against the five Threshold Conditions set out in the FCA Handbook. All five must be satisfied both at authorisation and throughout the regulated life of the firm:
- Location of offices: the body corporate (or other appropriate legal form) must have a principal office located inside the UK
- Effective supervision: the firm’s ownership and control structure (including its close links to other entities) must ensure that it can be effectively supervised by the FCA
- Appropriate resources: the firm’s financial and operational resources must be sufficient in terms of quality, quantity and availability
- Suitability: the key individuals running the UK business must be fit, proper and competent to carry out the roles required of them
- Business model: the firm’s business must be conducted in a sound and prudent manner and pose no threat of harm to consumers or the integrity of the UK financial system
Applicant firms should expect several rounds of questions scrutinising certain aspects of their application – this is completely normal. It is relatively rare for smaller firms to be interviewed, but in instances where this happens the FCA will generally give some prior warning.
The FCA’s processing fee for an investment manager deemed moderately complex, is currently £5,000. The fee must be paid during the process of submitting the application via the FCA’s Connect system. There will also be the cost of the consultant or law firm engaged – this will vary across providers.
The FCA is required by its statutory objectives to make a determination within six months of receipt of what it refers to as a ‘complete’ application. In the case of an incomplete application (i.e., where one or more elements have to be resubmitted or were omitted from the original submission), the FCA can take a maximum of 12 months. Our recent experience is that the FCA is using these limits to the full although they are also committed to increasing their capacity.
Legal form: branches vs subsidiaries
The FCA has provided guidance in ‘Our Approach to International Firms’ that is relevant to TPR firms seeking authorisation. The regulator warns that it will pay particular attention to the key risks applying to international firms such as the legal form of the UK entity, its relationship with other group companies, and supervisory standards of the home state regulator. It is clear that the FCA has a preference for applications from legally incorporated subsidiaries of third-country firms over branches, particularly because of the difficulty of ring-fencing a UK branch from a prudential perspective.
There are no specific requirements or different forms for an application from the branch of an EEA (or other third-country) firm. However, we expect such applications to be the subject of particularly heavy scrutiny by the FCA and many may end up being rejected. Given the FCA’s concern over incoming third-country branches, it is recommended that such applications include a detailed justification of why this is deemed the most appropriate, particularly if this is based on legal advice.
Being regulated by the FCA
There are important features of the UK regulatory regime that may be unfamiliar to EEA firms. Large parts of the FCA rulebook are, of course, still based on EU Directives and Regulations which were directly applicable prior to 1 January 2021. The extent to which UK and EU regimes will diverge over time is a matter of conjecture. An early example of this is the EU’s Sustainable Finance Disclosure Regulation (SFDR) which the UK chose not to implement but has now responded (in kind) with a consultation on climate-related disclosures.
Senior Managers and Certification Regime (SM&CR): One key difference in the UK is the increased liability falling on individual senior managers. SM&CR is designed to raise levels of accountability for poor behaviour. Senior Manager Functions (SMFs) must maintain Statements of Responsibility which describe the aspects of the firm’s operations for which they are held accountable. SMFs and other front-line staff must be regularly assessed for their fitness and propriety. And all staff are required to uphold a new Code of Conduct – with the threat that serious or repeated breaches of these rules may prevent them from being employed in other financial firms.
Investment Firm Prudential Regime (IFPR): The FCA is introducing its new IFPR for all UK firms carrying out MiFID investment activities from 1 January 2022. Although based on the EU’s own Investment Firm Regime which came into effect in June 2021, it is different in several important respects. All firms will be required to maintain the new Internal Capital Adequacy and Risk Assessment (ICARA) and will be subject to some requirements in respect of their remuneration policies.
Regulatory reporting: FCA-regulated firms are required to submit certain financial and non-financial returns via its RegData system. These are either on a quarterly or annual cycle based on the firm’s financial year-end.
Enforcement: FCA supervision, and enforcement action when things go wrong, can happen at two levels: the firm and the individual. The firm is likely to be held responsible for serious failings in management controls, but, increasingly, under SM&CR, the FCA is seeking to hold individual senior managers to account for breaches within their area of responsibility. Firms can be fined or ultimately have their authorisation revoked. Individuals can be fined or have their FCA approval withdrawn for a fixed term or permanently. Market abuse can also be prosecuted under the UK’s criminal regime, potentially leading to terms in prison.
As underlined in their recent Business Plan, the FCA is keen to present the UK as being open for business. At the same time, a big influx of international firms poses a significant threat to their regulatory perimeter and, in turn, to the integrity of the UK financial markets. Firms negotiating this entry point should not underestimate the challenges of a successful application.