Asset management: improving applications for authorisation

What we want to see

We expect decisions on the management of the firm’s business, portfolios, distribution and the effective overseeing of outsourced activities, to be taken in the UK on a day-to-day basis.

Senior managers should check they are able to visit and work in the UK as necessary to undertake their role.

Good practice

We have seen firms:

• Have individuals based in the UK for a proportionate amount of time for the business model they are undertaking and the risk the business poses.
• Ensure that, even where the business is ultimately owned by non-UK based individuals, UK based staff are sufficiently senior to challenge the firm’s owners.
• Where appropriate, have UK-based senior management function (SMF) holders at the firm who sufficiently oversee the other aspects of the firm’s business undertaken in other jurisdictions.

Areas for improvement

We have seen firms:

• Have individuals undertaking roles where they are not able to make decisions on the day-to-day running of the firm without seeking approval from overseas individuals.
• Run by offshore senior managers who do not have the right to work in the UK, or whose tax status limits materially the time they can spend in the UK.

What we want to see

Firms that outsource activities to third parties should show they understand that they’ll remain accountable for compliance with the relevant rules, and that they have the right policies and procedures to avoid harm.

Good practice

We have seen firms:

• Who have identified outsourcing arrangements and how they will oversee them.
• Use service level agreements (SLAs) to properly oversee and monitor the activities of their outsourced service providers. This allows them to make sure any failings can be identified and changes completed before harm occurs.

Areas for improvement

We have seen firms:

• Not consider the relevant rules, the applicant’s responsibilities, and the impact on their business when outsourcing.
• Fail to appreciate that, despite those activities being outsourced, responsibility and oversight for those activities will sit with the applicant.

What we want to see

Firms need to fully consider the risks their activities could pose to clients, the integrity of the UK financial system and the firm itself. The firm should have plans to mitigate and manage those risks appropriately.

If you intend to deal with retail clients, you should consider how the Consumer Duty[1] applies to your business. When developing, or launching, new products you should be able to clearly articulate and document how you have considered the obligations under the Consumer Duty, including the 4 outcomes for: 

• Products and services.
• Price and value.
• Consumer understanding.
• Consumer support.

Good practice

We have seen firms:

• Clearly articulate what impact any risk occurring would have on its clients, the business – including whether the risk would impact the viability of the business – and the integrity of the UK financial system.

Areas for improvement

We have seen firms:

• Not identify the risks their business model poses to clients and the integrity of the UK financial system and / or adequately consider and evidence how they might remove or mitigate those risks.
• Approach us with business models that pose an unacceptably high level of risk to the firm’s clients, in particular, to retail clients.
• Who engage with retail clients unable to adequately show how they apply the Consumer Duty.
• Who appear to have structured their business model to avoid rules that would give clients the expected level of protection.

What we want to see

Before applying for authorisation, an asset manager should consider the rules that will apply to its business for conflicts of interests, and have a plan for identifying, preventing and managing them.

Good practice

We have seen firms:

• Have a conflicts register specific to their business and details how the firm will identify conflicts of interest, the steps it will take to prevent conflicts arising and how it will manage these should it not be possible to prevent them arising.
• Able to document how often conflicts are reviewed and how staff are asked to disclose potential conflicts.

Areas for improvement

We have seen firms:

• Fail to identify and consider how to prevent and manage potential conflicts of interest adequately, or at all.

What we want to see

Firms should be able to show they understand who their clients are and the relevant rules that apply when engaging with them. A firm should be able to articulate how it will categorise its proposed clients, and a firm’s intended client base should be consistent across all application documents.

Good practice

We have seen firms:

• Have clear policies and procedures that comply with the relevant rules for those clients. For example, with retail clients intending to provide investment advice or sell investments, firms can show how they comply with the applicable appropriateness/suitability rules.
• Be able to clearly align their business plans and financial projections to the proposed client types. This includes understanding how the minimum / maximum investment corresponds with the proposed client type,
• Articulate the proposed investors in their funds. This includes how clients will be categorised and how the proposed products will be marketed to those clients in the context of the relevant Handbook provisions (such as PRIN, COBS, and PROD) and under FSMA.
• Who are dealing with retail clients or elective professional clients, provide their policies and procedures for categorising clients including, where applicable, any appropriateness/suitability tests and underlying scoring.

Areas for improvement

We have seen firms:

• Unable to show how they will engage or categorise their proposed clients, which could indicate a risk of client harm.
• Indicate they will be dealing with clients of a specific type in one document or section of their application. But this is not consistent with either the client types selected (where applicable) in the application form or with statements made in other application documents.

What we want to see

Clients should have access to appropriate schemes to protect them. To avoid delay, before applying, firms should consider the Handbook rules in (DISP) and (COMP) to identify whether they are likely to do business with an ‘eligible complainant’ – in the case of the Financial Ombudsman Service or the Financial Services Compensation Scheme (FSCS).

Good practice

We have seen firms:

• Be able to explain how the Financial Ombudsman (complaints) and FSCS (compensation) schemes do, or do not, apply to them including the rationale they used when arriving at their decision.
• Clearly communicate to consumers schemes that may or may not apply to them, making sure this is consistent with any views they’ve expressed in other communications.

Areas for improvement

We have seen firms:

• Seek exemption from the Financial Ombudsman and the FSCS when this is not appropriate. This can increase how long it takes to conclude our assessment.
• Assume that if they don’t have retail clients, they will not be in scope of the Financial Ombudsman or FSCS. This is not necessarily the case.

What we want to see

If an asset manager is applying for a variation of permission (VOP) to add new specified activities or investments or client types, the firm should be able to clearly articulate:

• How these will be used.
• What impact they will have on the business.
• How the firm has put the necessary staff, policies, procedures, systems, and controls in place to support the new activities.

To avoid delays, and reduce the risk of an unsuccessful application, an asset manager seeking to increase the scope of its permissions should explain the above matters fully in its application, and submit financial projections for the firm including the new business[2], if appropriate.

Firms who are reducing their scope, ie removing investment types or permissions (removal of some requirements or limitations may be an increase of scope) can show how this will impact their business and what their proposed business model will be. This is particularly relevant where a firm is looking to remove a part of business that would have constituted a significant part or generator of revenue.

Good practice

We have seen firms:

• Explain in sufficient detail how their business model may change, including financial forecasts and staffing.

Areas for improvement

We have seen firms:

• Claim that the addition or removal of activities will have ‘no material impact on a business,’ where this seems unlikely. For example, the removal of a permission that generates a significant portion of the firms revenue.
• Not able to clearly explain the need for a new activity or investment or client type. Or they are unable to explain the fit with the existing business model, the skills, and resources the firm is putting in place to support the new activity, and the additional revenues and costs.

What we expect to see

The firm’s fund documentation should include sufficient information on the fund that it intends to manage, including the proposed fees, the structure of the fund and the proposed assets the fund will invest in.

If a firm proposes to manage an alternative investment fund (AIF), it must provide various supporting documents. This includes a copy of any draft fund prospectus, draft offering memorandum or similar marketing material, terms of business or investment management agreement (IMA). Full scope AIFMs must also provide various additional documents with their applications, this includes the fund or instruments of incorporation of, and the draft prospectus for, each AIF they intend to manage.

Good practice

We have seen firms: 

• Provide draft documents (such as IMAs and prospectuses) as part of their application, that are representative of the final expected version.
• State fees that are consistent with any financial projections provided.
• Where fees and / or projections are not consistent with peers, firms have provided an explanation.

Areas for improvement

We have seen firms:

• Not provide fund documentation of sufficient quality or detail. For example, the documentation has not included the proposed fees or is generic and not tailored to the firm’s proposed business model.