Do the 'ground work' up-front
We come across applicant firms that are simultaneously trying to do the preparatory work whilst also trying to prepare an application. For instance, firms should have considered the following areas long before 'picking up the pen' on the Business Plan or any submission forms:
- What is the market opportunity?
- Which specific products will you offer and which types of clients will you target?
- How will you ensure good customer outcomes and demonstrate fair value?
- What do the base case financials (including prudential requirements) look like and when do you expect to break even?
- What funding do you require and where will this funding come from?
- Who will govern the firm, including who will be registered as Senior Management Functions?
- What operations do you need to deliver the business model, including non-financial resources?
- What are the key risks that your business will be exposed to and how will you seek to control or mitigate these?
- What are the key steps / execution risks to going 'live'? i.e., structuring, recruitment, fund-raising, systems testing etc.
In our view, the best-prepared applicants have given consideration to this, and have answers and senior management buy-in, before starting to prepare the application. Performing this 'ground work' up front lays the foundations for a successful application and de-risks the possibility of 'existential' and difficult questions arising during the actual application.
Accountable executive(s)
Getting to the point of submission to the FCA via Connect is no mean feat in itself and a number of applicants significantly underestimate how much senior management time is required for matters such as: key design decisions / discussion, review and approval of documents, key implementation decisions and potential FCA engagement. In our view, it is essential that the applicant appoints an accountable executive(s) – with sufficient capacity and bandwidth - to engage regularly with the delivery team and exercise oversight of the application process. In a similar vein, it is essential that the accountable executive is empowered to allocate resource to assist with the requisite aspects of the application, e.g., Finance resource to help with the financial model, as failure to do so can potentially hinder progress or quality of submission.
As an aside, applicant firms can sometimes fall into the trap of feeling as though they have 'outsourced' responsibility for the application to an advisory firm. Whilst advisory firms with the right experience and skillset can add considerable value and save time in the application process, the applicant is ultimately responsible for the application and standing by the submission in front of the FCA. This is where the accountable executive(s) performs a key role as the 'face' of the application in the eyes of the FCA.
Notwithstanding any of the above, we would note that senior management, over and above the accountable executive(s), will be required to input into decisions impacting their areas and challenge and approve via formal governance committees (i.e., Board of ExCo), and so applicants should ensure that there is sufficient management bandwidth available before deciding to proceed with an application.
Engage early where possible
The FCA offers a pre-application support service, which includes pre-application meetings where the applicant is a cryptoasset, payments or wholesale firm, designed to give the applicant the opportunity to ask any questions before making an application. This will involve meeting with a case officer who will outline the FCA's expectations and highlight useful information and, where possible, the FCA will try to allocate the same case officer to assess the application. There are also other initiatives for other applicant firms, including the FCA's regulatory sandbox offering (2), but we acknowledge that these opportunities to pre-engage with the FCA are not available to all applicants. In the first instance, potential applicants can reach out to the FCA, with a pre-prepared 'coffee deck' (i.e., a deck summarising the offering and key considerations, as well as timelines / implementation plans), and suggest a pre-application meeting, albeit the FCA may not grant this.
The advantages of pre-engagement are that: (i) it enables an applicant to explain the business and operating model to the FCA 'first hand' and take receipt of feedback in advance of submitting an application, whilst also starting to build a relationship with a potential case officer; and (ii) if done correctly, it is an opportunity for the applicant to demonstrate to the FCA that they are "ready, willing and organised" (see below). Conversely, if done poorly, pre-engagement can send a signal to the FCA that the applicant is not well-positioned to submit an application and perform regulated business, so applicants should bear this in mind.
Similarly, should you wish to engage a third party advisor, there is benefit to engaging so early, enabling an advisor to input into the initial "ground work" up-front and also serving to identify and work through any potentially problematic areas of regulatory or operational design.
Be 'ready, willing and organised…'
Now that you have done the 'ground work' and appointed an accountable executive, the FCA expects its applicant firm to be "ready, willing and organised" (3). The FCA has published its own guidance on its expectations in relation to this, including the fact that it expects the regulations governing authorisation, as well as requirements should you become authorised, to be taken seriously. As part of our regulatory network, we have held discussions with the relevant individuals responsible for authorisations at the FCA, as well as their case officers, with regard to what is meant in practice by "ready, willing and organised", summarised as below:
- Ready: is the applicant at a point where it can demonstrate that it is fully aware of the requirements, both in relation to the application but also on an ongoing basis?
- Willing: this relates to how the applicant engages and interacts with the FCA as part of the authorisation process, both in terms of quality and timeliness of responses, transparency and receptiveness to feedback.
- Organised: does the applicant understand what it needs to do to 'go live' and be ready for business on 'day 1'?
In our experience, the area where the FCA raises the greatest challenge is in relation to applicants being 'organised.' The FCA guidance refers to: "if we were to authorise you today, whether you would be able to carry out the activity you've applied for…" When pushed on this point, most applicants interpret this as the FCA pushing for all recruitment to have been finalised, all investor funds being raised and received and all systems build and testing completed. This is not the case. From our conversations with the FCA, they are looking for applicants to have a clear plan as to the requisite steps they need to take to 'go live' as part of a realistic delivery plan, with potential dependencies and contingencies identified.
In practice, indicators of "organised" are:
(i) a clear and complete implementation plan (staffed accordingly), with clear and realistic milestones to be achieved
(ii) some key roles filled, with individuals identified for other SMF roles still to be filled
(iii) investors identified and indicative contractual terms agreed and (iv) clear plans for technology systems build, testing and re-work / draft SLAs with third party suppliers.
Respond, clarify and iterate
As the FCA notes in its webpage guidance, applicants are unlikely to get authorised / registered straight away, with the FCA asking additional questions or seeking clarification on certain matters, so it is important that stakeholders' expectations within the applicant are managed appropriately. It is also not uncommon for the FCA to request additional information that does not form part of the original submission request generated on Connect (e.g., wind-down plans, CASS packs or detailed compliance documents). This does not mean that the applicant has fallen at the first hurdle or that the application is to be rejected.
What can be problematic for applicants, and apparent early on from FCA feedback, is where the FCA has a specific concern with the applicant's business model, operating model, financial viability or customer outcomes. Therefore, when the FCA requests further information, it is important (particularly in light of their "willing" expectation above) that this is taken seriously by the applicant to ensure that they respond thoroughly and in line with the timelines set by the FCA. It is also possible that the FCA may request updates to the Business Plan, as well as other key regulatory documents, so applicants should expect iterative engagement with the FCA.
The above are intended as helpful pointers to any applicant, authorised or non-authorised as yet, to consider as they plan for an application. Perhaps the most important point applicants should note is that the authorisation process as a whole requires applicants to be robust and show resilience; these authorisations are not by any means a formality and a successful applicant requires applicants to make a significant time, resource and financial investment.
Our team has experience of assisting dozens of firms across different sectors (including banks, investment firms, consumer credit, non-bank mortgage lender and payments / EMI firms) with applying for and achieving their regulatory authorisation, including individuals that have worked at the UK regulator previously and assessed firm applications. Our service offering ranges from: preparation of initial 'coffee deck' materials for FCA pre-engagement, formal advice on aspects of regulatory design (including business model, operating model, governance, risk management and prudential), formal drafting and submission or review of an applicant's submission documentation.
If you are thinking of potentially making an application, and would like to explore potential support or any of the themes raised above, our team would be delighted to have an introductory conversation.
References:
