Asset management: common errors when applying for authorisation


INSIGHT
Published
Apr 15th '24
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Avoid delays and increase your chances of being authorised to work in the UK asset management sector.

 

To help you apply for authorisation, the Financial Conduct Authority (FCA) has listed common issues with recent applications.

 

This is a non-exhaustive list of areas of concern, which have reduced firms’ chances of success or caused delays when the FCA determine applications.

 

Before applying for authorisation, firms wishing to operate in the asset management sector should consider the points below, alongside the relevant information for your type of firm.

 

Check what to include for your type of firm

 

FCA decisions: applying for new authorisation or variations of permission

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% were approved in under 8 months
  • 56% were determined in less than 6 months

 

How quickly we determine applications is largely based on your application’s completeness and clarity.

 

Between April 2023 and April 2024, 18% of applications were withdrawn due to the concerns set out below, or rejected by the FCA (due to poor-quality information).

 

Authorisation statistics

 

Common errors to avoid in applications

 

Senior management lacking experience or qualifications

A number of applicants failed to meet FCA expectations in relation to their senior management arrangements.

 

This is typically due to proposed senior managers either:

 

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

 

Learn more about FCA expectations of senior management function (SMF) holders

 

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

 

Office locations outside the UK 

Sometimes firms appear to misunderstand the ‘Location of Offices’ threshold condition.

 

The FCA expect 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.

 

It is not enough for a firm to do just its compliance or administration in the UK, or to have the people who make business decisions fly in from time to time.

 

Business models: exposing clients to risk

While the FCA accept that all business models pose risk, often applicants do not:

 

  • identify the risks that their business model poses
  • adequately consider and evidence how they might remove or mitigate those risks

 

Other applicants have approached the FCA with business models that they considered pose an unacceptably high level of risk to the firm’s clients (in particular, to retail clients).

 

Where a firm is engaging with retail clients, the FCA would expect you to demonstrate how you apply the Consumer Duty. Applicants that cannot do so adequately are unlikely to be successful.

 

The FCA also see applicants who appear to have structured their business model in a way that is intended to avoid rules that would give clients the expected level of protection.

 

You should consider FCA supervisory letters and pages relevant to your business model.

 

Outsourcing: underestimating your accountability 

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

 

The FCA understand that firms will outsource certain activities to third parties (either within or outside the same group of companies).

 

However, applicants sometimes fail to appreciate that, despite those activities being outsourced, responsibility and oversight for those activities will sit with the applicant. You will also be accountable for ensuring compliance with the relevant rules (see, for example, SYSC 8).

 

Conflicts of interest: failing to identify concerns

An asset manager’s business model typically involves the asset manager exercising a degree of control over client assets and money. This control can give rise to potential conflicts between the interests of:

 

  • the client
  • the firm
  • related parties

 

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.

 

It is not for the FCA to identify potential conflicts or the risks of such conflicts to the business. Should they do so, it would raise concerns as to whether the applicant is aware of the risks posed by its business and how to mitigate them.

 

Redress: avoiding appropriate schemes that protect consumers 

Some asset managers seek exemption from the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS) when this is not appropriate. This can increase how long it takes to conclude FCA assessment.

 

For example, firms sometimes assume that if they don’t have retail clients, they will not be in scope of FOS or FSCS. This is not necessarily the case, however.

 

To avoid delay, before applying, firms should consider the Handbook rules in DISP and COMP to identify whether you are likely to do business with:

 

  • an ‘eligible complainant’ (in the case of FOS)
  • an ‘eligible claimant’ (in the case of FSCS)

 

Read more on dispute resolution in the Handbook (DISP)

 

Read more on compensation in the Handbook (COMP)

 

Unready, unwilling or unorganised 

The FCA expect applicants to be ready, willing and organised to carry out the activities they plan to undertake.

 

The FCA has seen examples of firms who have submitted applications who were not ready, willing and organised; for instance, they had not recruited the relevant SMF holders or arranged for sufficient capital to be in place.

 

While they understand that circumstances can change during the lifecycle of an application, the FCA is not willing to:

 

  • put applications on hold for extended periods
  • accept significant changes to the proposed model (for example, changes in target market)

 

If there are significant changes to your proposed application, you 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 FCA standards.

 

Firms who withdraw an application may re-apply at a later date, once you have addressed any concerns.

 

In addition, the FCA would expect applicants to make them aware of any information that the FCA would reasonably expect at the outset and during the life of an application (see COCON 2.2.4).

 

Next steps for asset managers

Before submitting your application, review the relevant supervisory correspondence and pages for your business model.

 

If you meet the criteria, you can also submit a request to pre-application support service (PASS).

 

Find out more on how to apply

 

Source: FCA

 

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