Outlining the FCA’s approach to authorisation

Speech by Sarah Rapson, Director, Authorisations at the Association of Professional Compliance Consultants (APCC) Annual Conference.

Speaker: Sarah Rapson, Director, Authorisations
Event: APCC Annual Conference
Delivered: 14 March 2018
Note: this is the speech as drafted and may differ from the delivered version

Highlights

  • We use authorisation primarily to prevent harm and we use it in a proportionate manner.
  • We use authorisation to improve conduct standards and culture in firms.
  • We do not operate a zero-failure regime.

My subject today is our approach to authorisation, on which we have just consulted. We are now analysing responses, so it’s too early to give feedback, but I would like to thank APCC for your response and assure you that we will consider carefully what you have said. Later this year, we will publish the final paper and I’d be happy to come back and talk about it then, if you would find that useful.

Today I will focus on three things that link directly to the questions on which we consulted:

  1. How we use authorisation to deliver the FCA Mission.
  2. How we help firms to meet our minimum standards.
  3. How we are improving our approach and being more transparent about our performance.

On this last point, we have a major change programme underway that is already delivering benefits, with more to come. I will talk about how it is improving the authorisation process for your clients, whilst maintaining our underpinning regulatory requirements.

I am sure that you are familiar with the FCA’s Mission, so I do not propose to discuss that in detail. I shall, however, highlight three points about our approach to authorisation that can be overlooked or misunderstood.

The first is that we use authorisation primarily to prevent harm and we use it in a proportionate manner. In practice, the information that we require from firms, and the scrutiny we give to applications, are linked inextricably to our assessment of the risk of harm, mainly to consumers. These will vary, according to that assessment.

The second is that we also use authorisation to improve conduct standards and culture in firms. We test the most significant factors that can create harmful cultures within firms’ business models and their conduct.

The third is that we do not operate a zero-failure regime. To prevent all firm failure or harm to consumers would be unachievable; it would also be undesirable as it would stifle innovation and competition.

Some people think there is a trade-off between competition and consumer protection. I disagree - competition and innovation are essential.

Some people think there is a trade-off between competition and consumer protection. I disagree - competition and innovation are essential. Inevitably, however, some firms will fail. When this happens we aim to ensure that firms exit the market in an orderly way that mitigates potential harm to consumers and the market. We also recognise that firms with new and innovative business models won’t necessarily understand what it means to be regulated. We aim to support them to understand and to meet our minimum standards.

These minimum standards are crucial. Firms that wish to provide regulated financial services and relevant individuals in those firms must meet common sets of minimum standards – known as Threshold Conditions for firms and the Fit and Proper Test for individuals. Importantly, they must continue to meet the standards for as long as they are authorised. Ensuring this is primarily the responsibility of my supervisory colleagues at the FCA and, for certain firms, the Prudential Regulation Authority (PRA). The FCA will soon consult on its approach to supervision.

In our experience, most applications are quite straightforward. But some are complicated, sometimes needlessly so. This may be because some firms don’t understand the Threshold Conditions. We consulted on this and asked what more we could do to explain them and the purpose behind each one.

With that in mind, it is important that we set out clearly our expectations before firms begin the authorisation process. We also need to consider how we, the FCA, and you and your clients can avoid pitfalls that cause delay or even lead to refusal or rejection of applications.

For our part, we will do as much as we reasonably can to support firms to become authorised, while never lowering the minimum standards that we expect them to meet. We look to you to understand our approach to authorisation and the minimum standards they must meet, and to advise your clients accordingly. Before I finish, I will set out some common pitfalls and how these can best be avoided.

Authorisation as a remedy to prevent harm

In the Mission we describe the FCA’s decision-making framework that guides how we use our resources, including which tools we will use, to prevent harm or put things right when they go wrong.

Within this framework, authorisation is a remedial tool that we use to prevent harm by ensuring that firms and individuals meet the minimum standards. This is not as strange as it may seem. Typically we think of remedies as being required to fix problems that have occurred; but they can also prevent them. To understand this is to understand much about our approach to authorisation and to helping your clients get the desired outcome.

I have said that we aim to be proportionate in the information that we require from firms and in our scrutiny of their applications. We do not operate a ‘one size fits all’ model. On the contrary, we are guided by the principles of good regulation, recognising differences in the businesses of firms that wish to be authorised. Essentially our approach is determined by the risk of harm that we believe a firm poses.

Conduct and culture in firms

Let me now turn to how we use authorisation to improve conduct and culture in firms, which is created by typical patterns of behaviour and ways of thinking that are reinforced over time. We test the most significant factors that can create harmful cultures, including a firm’s purpose, its leadership, its approach to rewarding and managing people, and its governance arrangements, including where the ‘mind’ of a firm is located.

The actions of individuals define a firm’s culture. In the wake of the financial crisis and subsequent significant conduct failings, such as the manipulation of the London Inter-bank Offered Rate (LIBOR), there has been a greater emphasis from government on the need for personal accountability. This led to the creation of the Senior Manager and Certification Regime, which aims to reduce consumer harm and strengthen market integrity by making individuals more personally accountable for their conduct and competence.

The regime is being extended to include all regulated financial services firms and will replace the current Approved Persons Regime. It will, therefore, have an impact on your clients. My colleagues will speak about this later, so I shall not steal their thunder. I simply observe that it will change significantly the current regime under which we approve individuals, for example by requiring senior managers to have clear statements of responsibility.

Competition and innovation

Authorisation is not only a preventative tool, keeping the gate shut to firms and individuals who do not meet the minimum standards. As I noted earlier, we use it also to promote competition and innovation - in other words to open the gate.

Regulation can be complex and hard for firms to understand. It has not always kept up with innovation, with some firms operating business models that could not have been foreseen when the rules were made. I don’t think anyone should be too surprised at this and, of course, it’s not a challenge limited to the financial services sector. But I recognise that regulatory uncertainty or complexity in the authorisations process can be a problem for firms.

These challenges can pose an even greater barrier for firms that are new to the market, innovative - or both. So, we have a range of initiatives we use to support firms to understand and meet the minimum standards. We give pre-application support to innovative firms. We enable them to test new products or services in a safe environment. We support and encourage new entry into retail banking. We offer specialist help to asset management firms. We give feedback to firms wishing to offer automated advice.

We also recognise that firms in the start-up phase may find it difficult to meet some minimum standards for authorisation, such as having appropriate financial resources. Some firms, for example, may only be able to attract the required investment once we have authorised them. We will consider these situations carefully and may decide to authorise a firm ‘subject to’ a restriction, limitation or requirement that it must meet from the point of authorisation. This could include, for example, limiting a firm’s ability to operate by restricting the number of customers it can take on until it has met certain conditions.

Depending on the size, complexity and needs of the firm, and our available resource, support can range from a phone call to clarify how our rules apply to a specific business model, to on-going support to help an innovative start-up prepare for authorisation. It may include helping firms understand the rules, or supporting them as they shape their business models in more detail.

We are considering how to ‘industrialise’ these approaches. In the consultation, we invited comment on how we can improve this support for firms.

This support is over and above the public commitments that we outline in the consultation, which are more concerned with what firms may expect from us during the application process. But let me reassure you that we are not trying to steal the food from your plates. While we do give firms as much assistance as is reasonable, there are limits to what we should and can do. The FCA does not provide consultancy advice.

Becoming supervised

You understand that demonstrating a firm meets the minimum standards, and will continue to meet them, is not a simple box-ticking exercise. Becoming authorised is not like passing an exam. The firm cannot put the books away and forget everything it learned along the way. It must maintain the minimum standards for as long as it is regulated. We recognise that becoming supervised by the FCA is a significant step; as part of improving our service focus, we will support firms more consistently as they enter the system of supervision, providing appropriate levels of help and guidance to navigate the process.

Using digital technology and data

It should be no surprise that we also intend to deploy digital technology and data to their greatest effect. External manifestations of this include improving the clarity of the authorisation pages of  our site, making the handbook easier to navigate and improving the Financial Services Register.

Linked to the better use of data are improvements to how we measure and report our performance. Following consultation, in December we published a more comprehensive and, in my view, more useful set of performance indicators covering the second quarter of this financial year. Consistently and across all types of application we show the numbers of applications received, determined and on-hand, and the minimum, maximum, mean and modal times for case determination.

We also show our performance in terms of the cases that should have been decided in the period. For example, we decided 99% of cases within statutory deadlines that fell due during the second quarter of the year. The average for determining new authorisation applications was under 13 weeks. For straightforward, very low risk consumer credit cases, the average was under one week. Publishing these data means that you can track whether or not we are meeting our commitment to improve service and call us out on it if we don’t.

But we will, of course.

Common pitfalls

Now, I said earlier that I would set out some of the common pitfalls that we see firms encounter. I’m sure you have examples of applications that did not go to plan. Situations like this are in no-one’s interest. So how can we avoid them?

For our part, we need to act, and be seen to act, in a proportionate, predictable and consistent manner. We need to give appropriate levels of support to firms. And we must ensure that we communicate our concerns and expectations clearly. The key for firms and their advisors is to understand the rationale behind our approach to authorisation, hence our consultation. Firms must take note of those concerns and rectify the problems.

Some examples of pitfalls into which firms can fall:

  • Sometimes firms fail to provide information we request, or they provide the wrong information, or overcomplicate their responses. This could be because they do not understand our concerns or the questions we ask or why we ask them. If in doubt, they should ask us.
  • Similarly, firms can misunderstand what is required of them, especially where there is new regulation, such as PSD2 or MiFID2. Again, they should speak with us if they are uncertain as to our requirements.
  • From time to time we deal with firms that will not engage with us or do so reluctantly; or they address our concerns in part but not fully. In such circumstances we may well conclude that a firm is not ready to be authorised and could not be supervised effectively. My message is simple; firms need to cooperate with us.
  • Sometimes firms apply for authorisation prematurely, before they are ready to demonstrate that they meet the minimum conditions; at very least this will delay our consideration of their applications, especially if they also fail to provide the information that we require. Firms should apply when they are ready, not to secure their place in the queue.

Those are just a few examples. But the common theme is that firms that understand what we are trying to achieve through having a rigorous approach to authorisations and why, are more likely to be successful in their applications.

Our ambition is to continue to improve our approach to authorisation, ensuring that we use it to deliver maximum public value. We will continue to take a proportionate approach to preventing harm. We will continue to use authorisation to help improve conduct, culture and governance in firms. We will continue to be imaginative in our use of authorisation to promote competition and innovation.

Our ambition

Our ambition is to continue to improve our approach to authorisation, ensuring that we use it to deliver maximum public value. We will continue to take a proportionate approach to preventing harm. We will continue to use authorisation to help improve conduct, culture and governance in firms. We will continue to be imaginative in our use of authorisation to promote competition and innovation.

Firms will find it straightforward to engage with us. We will be clear about our expectations of them. They will know what to expect from us and we will deliver consistently, for example in terms of our set of public commitments to them. Consumers will find it easier to access data from the FS Register about which firms and individuals are authorised. And we will continue to communicate with and listen to you, as the trusted advisers to firms.

At the FCA, we tend to refer to authorisation as ‘the gateway’. I hope that what I’ve said today will help to make it clear that it should never be considered as ‘the wall’.