Focused on FSA authorisation – Meeting the complex requirements –

What is the process for authorisation?

Applying for authorisation from the Financial Services Authority (‘FSA’) is a significant undertaking and should be treated as a major project in its own right, with appropriate project management and dedicated resources.

The information the new firm will need to provide to the FSA is extensive: it may take several months prior to submitting the forms to gather together all the information the FSA will require. After the application has been submitted, the FSA may take between 2-3 months to decide on an application.

The process for FSA authorisation is as follows:

Stage one: initial planning

The new firm must take decisions concerning its purpose and structure:
• What activities will it be carrying on?
• How will its activities relate to those of its group?
• Who will be its directors and senior management?
• Who will have overall responsibility for the FSA application?
• Which individuals in the firm (and external advisers, if need be) will be responsible for specific aspects of the application?

The more settled these issues are, the quicker and cheaper it will be to complete Stages two and three.

Stage two: information gathering

The firm will need to gather together all the information and documentation which it must submit to the FSA as part of the authorisation application. This will involve compiling a number of substantial documents (including a business plan, compliance manual, compliance monitoring programme, etc – see below for details). The firm may also need to instruct auditors to assist them with the financial aspects of the application, such as the capital requirements and projections.

During this stage, priority should be given to:

• any documentation that requires external assistance or input, such as the financial information and IT controls form (if required) and any outsourcing contracts
• documents such as the business plan and the compliance manual, which are complex documents and will probably require input from several parts of the business.
The firm may wish to liaise with the FSA during this stage, particularly if the proposed business is unusual or complex.

Stage three: completing the forms

In practice, this stage runs concurrently with Stage two, as forms will usually go through more than one revision before they are finalised.

Stage four: submitting the application

Once the forms are completed, they will be submitted to the FSA, together with the appropriate fee. For a ‘straightforward’ application the fee is £1,500. The fee is £5,000 for a moderately complex application, and £25,000 for a complex application. As a rule of thumb, anything which involves only arranging or advising will be straightforward; anything involving investment management will be moderately complex; and anything involving deposit-taking or any sort of banking activity will be complex.

Stage five: liaising with the FSA

The FSA will appoint a case officer for the application. They will review what issues or considerations in the application require further analysis.

The FSA will usually take between six and 12 weeks to decide on a straightforward application, although in theory they have up to six months to decide (or longer, if the firm has submitted an inaccurate or incomplete application). The FSA may wish to meet the senior management of the new firm and inspect its premises.

Stage six: the FSA’s decision

Assuming there are no problems with the application, the FSA will inform the firm in writing that the application has been successful. The FSA will expect the firm to commence its regulated activities in accordance with the timings proposed by the firm in the application.

What forms must be submitted?

The forms to be submitted to the FSA will depend on the firm’s proposed activities.

• The ‘Core’ form: possible attachments to this form include:
– staff organisational chart
– details of IT systems
– details of business continuity arrangements.

• A ‘Supplement’ form: this form will vary depending on the proposed activities of the firm. Possible attachments to this form include:
– business plan
– details of outsourcings
– details of risks affecting the business
– assessment of competence and capability of key personnel
– Compliance Monitoring Programme
– financial crime information
– detailed IT controls form.

• Form A: each individual performing a ‘controlled function’ in the business (see below) will need to submit a ‘Form A’ to be individually approved by the FSA. Depending on their circumstances, the individual applicant may need to attach additional information to the form (such as a CV, list of directorships, details of previous convictions or encounters with regulators, etc).

• Owners and Influencers Appendix and a Controller’s Appendix for each ‘controller’ of the firm (see below). The firm should also submit a corporate structure chart showing details of its controllers.

• Checklist and declaration.

These forms can be downloaded from the FSA website: www.fsa.gov.uk

What issues must be considered?

This section sets out a high level analysis of the issues that the firm will need to consider and resolve before it can submit the application for FSA authorisation.

Basic information

The firm must provide details of an individual who will be a point of contact for the FSA during the authorisation process. It should also provide details of professional advisers assisting with the application (eg lawyers, compliance consultant, auditors).
Among other things, the firm must also give details of its legal status, its website (if applicable), its reporting accountants and its financial year end.

This information should be provided in the Core form. The firm’s business

The firm must provide information on its business plans, including details of the kinds of clients it intends to deal with and what its sources of income will be. The firm must also provide an assessment of the main business risks it will face and details of any key outsourcing contracts and how it will monitor those contracts.

The firm must also submit a Business Plan, which will be an attachment to the Supplement form. This document should include details of the following:

• how the firm’s regulatory permissions will apply to its business
• what its customer base will be
• how its transactions will be structured in practice
• what its plans are for the business
• what competition the business will face
• who the management are and their experience
• what its budget and resources (human, systems and capital) will be.

The bulk of this information should be submitted in the Supplement form and in the Business Plan attached to the Supplement form.

Permissions

The firm will need to decide which regulated activities the new firm will be carrying out and in relation to what investments.
The permissions that the firm holds will have a significant impact on its compliance arrangements, in particular which of the FSA’s Conduct of Business rules will apply, and on the level of capital that the firm will need to hold.

These permissions should be set out in the Supplement form and an explanation provided for the permissions chosen included in the Business Plan attached to the Supplement form.

Financial arrangements

The new firm will need to maintain a certain level of capital specified by the FSA: the riskier its activities, the greater the capital it will need to hold. The firm must demonstrate how it will hold and maintain that level of capital.

The new firm may also need to submit balance sheets, a monthly cash flow forecast, a monthly profit and loss forecast and a monthly financial resources/capital resources against its financial resources/capital resources requirement.

Detailed financial information should be submitted in the Supplement form and the Business Plan attached to that form.

The Group structure: ‘controllers’ and ‘close links’

The FSA will require information on the controllers of the firm (broadly, anyone with 10% voting rights over the firm, including its ultimate shareholders). Each controller will need to submit a form with the application: for corporate controllers this will require information on their solvency (usually through providing accounts) and the identities of their directors.

The FSA will also require information on the firm’s ‘close links’ (broadly, other companies in the firm’s immediate group). In practice, this information tends to overlap with information to be provided on the firm’s controllers.

High level information on controllers should be provided in the Core form. The FSA will also require the firm to provide detailed information on its group as part of the Owners and Influencers Appendix and in the specific controllers appendices filed by each controller.

Internal organisation: key personnel

The firm will need to give information on its internal organisational structure, with details of the individuals who will carry out key roles in the business (whether management or customer-facing) and its reporting lines. It will need to provide information on these individuals’ competence and capability.

Also, each person carrying on a ‘controlled function’ (ie a key role in the business such as being a director, the compliance officer or dealing with customers), will need to be individually approved by the FSA. Specific roles within the business will be specific controlled functions (often abbreviated to ‘CF’): for example, a chief executive will usually need to be approved for the chief executive controlled function (CF3), as well as the executive director controlled function (CF1).

Each person applying to perform a controlled function will need to provide information on their previous employment (including any reasons for dismissal from previous employment) and make declarations concerning their fitness and propriety, disclosing any convictions or court/regulatory judgments where appropriate. Individuals dealing with retail clients may also need to have passed specific examinations before they are approved by the FSA.

These disclosures should be made in the Core and Supplement forms. The firm will need to submit a staff organisational chart with the Core form. Each individual applying for approval must submit a Form A, signed by the applicant and countersigned by the firm. Individuals in management roles will need to provide a copy of their CV and details of any directorships (whether in the UK or not) held in the last ten years.

Please note that the number of customer-facing personnel will have an impact on the regulatory fees and levies that the firm will be obliged to pay to the FSA once it is authorised: the firm will need to provide information on this in the Supplement form.
Systems and controls

The firm must demonstrate that it has systems and controls appropriate to the business it is conducting. It will also need to provide information on its business continuity arrangements and the software it will use in the course of its business.
The bulk of this information will be submitted in the Core form. If the firm is using bespoke software or is otherwise heavily reliant on one software application, it may need to provide a detailed IT Controls Form as an attachment to the Supplement form. This form will need to be reviewed and signed off by an auditor and, in practice, the firm will need to work closely with its auditors while drafting this attachment.

Compliance

The firm must demonstrate that it has appropriate arrangements in place to enable it to comply with the FSA Rules and other relevant regulation or legislation as soon as authorisation is granted. It will need to submit a ‘Compliance Monitoring Programme’ (a programme of actions to check it carries on, and continues to carry on, its business in line with its compliance procedures) with the application.

It will also need to have prepared a Compliance Manual appropriate for its business: it need not submit the manual with the application, but the FSA may request to view the manual while it is evaluating the application. The manual should address the firm’s compliance with the FSA Rules, in particular the FSA’s conduct of business rules, and consequently the firm must determine which FSA Rules will apply to its activities prior to submitting the application.

The firm will also need to provide information on how it will address its responsibilities concerning financial crime, in particular how it will comply with the UK’s anti-money laundering legislation.

The firm must provide information on its compliance arrangements in the Supplement form.