FCA Authorisation: What is the basic process?

The sections below summarise the basic process for obtaining FCA authorisation for your UK management entity.

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Why do I need to be authorised?
  • Certain activities require regulation by the UK Financial Conduct Authority (FCA) if carried out in the UK. Carrying out these activities without obtaining authorisation (called Part 4A Permission) is a criminal offence and may impact on the enforceability of contracts. There is also a parallel UK regulatory regime requiring banks and insurance companies to be authorised by the Prudential Regulation Authority (PRA). The PRA regime is beyond the scope of this guide.

    The main activities relevant to investment managers are as follows.

    Activities under the AIFMD regime:

    Managing an AIF: being appointed by your fund to be primarily responsible for risk management or portfolio management for your fund, if that fund is an AIF, is a regulated activity.

    Activities under the MiFID regime:

    Arranging deals in investments: marketing your fund, or sourcing investment opportunities for your fund is a regulated activity

    Advising on investments: providing research and/or investment recommendations in relation to specific investments, other than where such advice is provided intra group, is a regulated activity

    Managing investments: managing assets belonging to another person, in circumstances involving the exercise of discretion, is a regulated activity. This includes acting as sub-investment manager on a delegated basis in relation to a fund which is an AIF

    Dealing as agent: buying or selling investments as agent on behalf of a third party is a regulated activity

    Agreeing to carry on activities: agreeing to carry on the activities listed above is also a regulated activity.

    An AIFM can also have permission to carry on these activities on a “top-up” basis, separately from managing an AIF for example, when providing segregated portfolio management services. The permission of “Managing an AIF” automatically includes these MiFID activities when carried on for a fund which is an AIF in the course of providing the regulated activity of managing an AIF.

    The provision of custody services is also regulated and the FCA additionally regulates the activity of “Arranging safeguarding and administration of assets” which covers the negotiation and arranging of custody arrangements for a client. This arranging activity would be included in the "Managing an AIF" permission, but would need to be separately obtained if needed when providing segregated portfolio management services. Custody permissions need to be separately applied for but an AIFM is not permitted to provide custody for the fund assets.

How do I become authorised?
  • You need to meet the Threshold Conditions, which are the FCA's minimum standards for becoming, and remaining, authorised; see below.

    The process of applying for authorisation requires the proper completion and submission of certain prescribed forms:

    An applicant for Part 4A Permission, except in so far as the FCA may direct in individual cases, must apply in writing in the manner directed, and with the information required, in the application pack provided by the FCA

    A MiFID investment adviser or investment manager will generally be a "wholesale investment firm" and should follow the FCA application pack process for that category. An AIFM under AIFMD will also need to follow the FCA’s specific process for AIFMs.

    The forms required will include some or all of the following:

    A core details form - this requires factual information about the business structure, controllers, management and personnel. Information on systems and controls, including business continuity is also required here

    Supplement for investment managers - this covers the applicant's regulatory business plan, its proposed customer types and investment strategy, and the scope of regulatory permissions required. This form also requires information on financial resources and cash flow projections, further detail on personnel and compliance arrangements

    Forms for individuals who will be performing "controlled functions" (called Approved Persons; see below)

    Owners and influencers appendix

    Forms for controllers - persons who (broadly) hold or control 10 per cent or more of the applicant

    IT Controls form - for those firms who are more dependent on IT systems, and

    Supporting documents including org charts/ financial information / compliance procedures, etc.

    For new applicants seeking authorisation as AIFMs, in addition to the requirements specified above, a firm applying to be an AIFM also needs to submit the following to the FCA:

    The Variation of Permission (VOP) form which acts as a checklist of the AIFMD-specific requirements (see “What are the ongoing requirements for an authorised firm?” below) with further details where necessary. The VOP form includes information relating to: the FCA permission profile for the AIFM; the regulatory business plan; financial resources; conditions for authorisation; approved persons; AIFs and depositary arrangements

    Schedule of AIFs – various details in respect of any AIF for which the firm is to be appointed as AIFM, including its name, constituting instruments (eg Articles of Association) and its investor disclosure document (prospectus).

    See the FCA guidance on the wholesale investment firm application process on its website. And for the AIFM application requirements, see the FCA’s AIFMD website pages for further information and links to the forms.

    For applicants which are limited liability partnerships (see legal entities, below) the FCA will need to see a signed LLP agreement before granting authorisation.

    Most applicants use a compliance consultant or their legal adviser to manage the application process for them as this will make the process smoother for a first time applicant.

    Simmons & Simmons can give information on compliance consultants with whom we work frequently on request or can assist on your application if you prefer.

What are the threshold conditions?
  • The Threshold Conditions represent the minimum conditions which a firm is required to satisfy, and continue to satisfy, in order to be given and to retain authorisation:

    Location of offices: the authorised firm's head office must be in the UK. This is regarded by the FCA as where the directors and other senior management (ie those who make decisions relating to the UK firm's central direction and the material management decisions of the firm on a day to day basis) and where the central administrative functions of the firm (for example, central compliance, internal audit) are located. This is a condition that subsidiaries of non-UK based managers can sometimes find difficult to meet if there is no person of sufficient seniority in London

    Effective supervision: the UK firm must be capable of being effectively supervised by the FCA having regard to the nature and complexity of its business and must not have any close links (ie controllers or other affiliates) which would prevent the FCA's effective supervision

    Appropriate resources: the resources of the firm (including non-financial resources such as personnel) must, in the opinion of the FCA, be appropriate in relation to the regulated activities that it seeks to carry on, or carries on. This is more general and is separate to the strict capital requirements described further below

    Suitability: the firm must satisfy the FCA that it is a fit and proper person having regard to all the circumstances including nature of the business and experience of the personnel running the business

    Business model: the strategy of the firm for doing business must be suitable for the regulated activities that it seeks to carry on, and in this context the FCA will look at whether the business model is consistent with the business being conducted in a sound and prudent manner, the interests of consumers and the integrity of the UK financial system.

How long does it take?
  • In relation to a MiFID firm, if the application is complete, the FCA is obliged to respond within six months. If the application is incomplete it is allowed up to 12 months. Where the application is for approval to manage an AIF, the FCA must respond within three months, extendable up to six months if notified to the applicant firm. In practice for most applications to carry on MiFID investment advisory or investment management activities, these are being processed by the FCA within five months from the date of application. We do not yet have enough evidence of how long it will typically take the FCA to process AIFM applications.

How much will it cost?
  • There are various levels of cost; initial and ongoing.

    Application and start-up costs: the costs of engaging a professional to assist with the application process and the costs of establishing the legal entity and preparing any LLP agreement for any applicant which is a limited liability partnership

    FCA costs: the FCA charges a fixed application fee, which is £5,000 for a portfolio manager (which will include any firm whose permission includes managing an AIF) submitting a “moderately complex” application. Please note that additional fees may apply for each AIF registered or notified to the FCA for managing and/or marketing under AIFMD

    Expert adviser costs: depending on your business, you may need assistance to complete/review an IT Controls form for the FCA and help with preparation of financial projections and calculation of regulatory capital requirements

    Regulatory capital costs: the FCA rules require firms to carry a minimum amount of capital which depends on the activities of the business and the size of the business:

    If the firm is a MiFID firm, the capital requirement is likely to be a minimum of €50,000 and unless it is an exempt CAD firm, the business will also be required to carry, if greater, an amount equal to at least 13 weeks' expenditure, based on projected expenditure forecasts provided to the FCA. (An exempt CAD firm is limited to carrying on advisory and arranging activities; it cannot carry on discretionary management activities or deal in investments for its clients)

    Where a firm is an AIFM, the capital requirements will be governed by and calculated according to AIFMD (and will be dependent on its fixed overheads, and the value of the assets under management). An AIFM must hold, at a minimum, the sum of (i) €125,000; (ii) the greater of (a) one quarter of its projected annual fixed overheads amount or (b) own funds equal to 0.02% of the amount by which the value of the funds under management (calculated according to AIFMD) exceeds €250m; and (iii) an additional amount to cover professional liability risks or appropriate PII cover.

What legal entity do I need
  • In order to benefit from the EU passporting regime, and to avoid bringing any non UK entity into the UK tax net, a UK body corporate is generally recommended. This can take two forms:

    Private limited company
    Limited liability partnership

    Simmons & Simmons can provide further information on the merits of either vehicle upon request (as a starting point, please see Step 3b: For my UK entity, should I use a limited liability partnership (LLP) or a private limited company?) Many firms are set up as LLPs due to the more flexible nature of the vehicle compared to a limited company and the self-employed tax status available to its key principals.

What are approved persons?
  • The UK legislation requires persons performing certain functions (referred to as "controlled functions") to be approved by the FCA in advance. These are as follows, and are set out in the FCA Handbook:

    Governing Functions (Directors, Partners, etc.)
    Required Functions (Compliance Oversight, MLRO)
    Systems and Controls Function
    Significant Management Function (less relevant for a new investment manager)
    Customer Functions (eg for those carrying on investment advisory or portfolio management activities)

    For a newly established business, the FCA is likely to require (and will require for an AIFM) a minimum of two senior individuals to be involved with the operation and management of the UK business.

    For wholesale business, there are no longer specific exam requirements. However, firms can still request employees to take exams to be satisfied that an individual has the requisite skills, knowledge and expertise.

How do I take on employees and do I need work permits?
  • Note that in the UK employment is not "at will". A written contract will be required and certain mandatory terms will be implied by law.

    Appropriate work permits will be required by non EU nationals and Simmons & Simmons can recommend legal advisers who can advise on the necessary steps and process.

What are the ongoing requirements for an authorised firm?
  • The Threshold Conditions require ongoing compliance. Other applicable FCA rules differ depending on the nature of the business being undertaken and the following is a high level summary of some of the key requirements:

    General Principles: the principles are a general statement of the fundamental obligations of firms under the UK regulatory system. These underpin all the more detailed rules in the FCA Handbook and the FCA has the power to fine firms for failing to adhere to the General Principles

    Marketing: there are detailed rules applicable in the UK and elsewhere in the EU to marketing offshore unregulated collective investment schemes. Broadly, in the UK, unless certain criteria can be satisfied regarding the expertise and experience of any individual, marketing is broadly limited to those institutional investors who can be classified as "professional clients" or "eligible counterparties" within the FCA's client classification requirements. The majority of managers of offshore unregulated funds will not have permission to conduct investment activities with retail clients. For AIFMs, AIFMD also imposes prescriptive disclosure and reporting requirements in relation to AIF marketing activities

    Dealing and managing: for those firms undertaking dealing or portfolio management activities there are extensive provisions designed to ensure the clients of the firm are treated fairly. There is no relaxation even where the firm's sole customer is an offshore fund established by it. Provisions for example cover:

    Best execution - a duty to achieve the best possible result for the client when executing trades
    Soft (dealing) commissions - there are detailed rules restricting the use of soft commission credits to pay for certain manager expenses, and
    Client order handling - to ensure fair allocation of orders PA Dealing.

    For an AIFM, many of the conduct requirements apply directly to AIFMs under the AIFMD European regime.

    Systems and controls: the FCA rules require a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. For both MiFID firms and AIFMs, there are detailed provisions underpinning this overall principle

    Monitoring and reporting: the FCA rules require a firm to undertake ongoing monitoring of compliance with the FCA rules. They further require a mix of quarterly, six monthly and annual reports on various items. For AIFMs, further information and reporting requirements apply, which will be either on a quarterly or half-yearly basis depending on whether assets under management (as calculated under AIFMD) exceed EUR 1 billion. The requirements are set out in the FCA Handbook and in AIFMD

    Regulatory capital: a firm is required to maintain, on an ongoing basis, the required level of capital (as described above). MiFID firms and AIFMs with “top up” permissions are also required to carry out a risk assessment on an annual basis called an ICAAP (Individual Capital Adequacy Assessment Process) An ICAAP is the process by which a firm's senior management consider their business risks. It requires the documentation of the key risks, details of the management of those risks and consideration of any capital that might need to be set aside to adequately mitigate those risks. Where a firm identifies additional capital needs through its ICAAP, this additional capital should be held, and becomes the firm's new minimum capital requirement

    Liquidity: MiFID firms and AIFMs with “top up” permissions are also required to maintain liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that their liabilities cannot be met as they fall due. Its strategy and systems for managing liquidity risk are required to be reviewed annually

    Transaction reporting: firms are required to report to the FCA all transactions in specified financial instruments which are traded on an EU regulated market, whether or not the transaction concerned actually takes place on an EU regulated market, as well as OTC trades in derivatives whose underlying is a debt- or equity-related financial instrument traded on an EU regulated market. The firm can agree that such reports will be made on its behalf by a third party, such as the relevant counterparty. For trades taking place on an EU regulated market, certain markets will undertake to report the transaction on the firm's behalf

    AIFMD-specific requirements: Under the AIFMD regime, there are additional organisational, structuring and conduct requirements specific to AIFMs. These include, in overview, requirements to ensure that the fund appoints a depositary, certain additional policy requirements (e.g. around portfolio liquidity, portfolio risk management, valuation), restrictions on delegation, transparency and restrictions on the use of leverage in the portfolio and new rules on remuneration. More detail on these AIFMD specific requirements can be found in our AIFMD Toolkit.

    This note serves as an introduction to the UK authorisation regime and is not exhaustive. We are happy to advise further on any of the issues highlighted above.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.