This article highlights some of the long-term benefits of becoming directly FCA authorised which for many firms, will outweigh the initial investment of becoming directly authorised and set your firm on a path to long-term growth, stability and success in the UK financial services market.
- Enhanced Market Value and Appeal
Direct authorisation can make a business more attractive to buyers as appointed representatives do not have the operational and financial dependencies associated with appointed representatives. Directly authorised firms can be easier to integrate and scale due to their independent regulatory structure without the need for approval from a principal.
- Greater Control
Directly authorised firms have full control over their compliance processes, policies and decision making. By establishing their own systems that align with the firm’s specific needs, they do not need to rely on a principal firm for compliance requirements and approvals which may not suit the appointed representative’s needs or client base. For example, a directly authorised firm can directly decide to adopt new technology in compliance checks without requiring or waiting for external approval from the principal.
- Improved Client Confidence
Direct FCA authorisation may open doors to new business opportunities as it may be viewed as sign of stability, maturity, and commitment to the financial services market, which may be beneficial when approaching high-net-worth or institutional clients.
- Reduced Costs Over Time
Whilst there are initial costs and setup expenses associated with becoming directly authorised, over time direct authorisation can be more cost-effective compared to the fees appointed representatives pay to their principal firms. By becoming directly authorised, a firm avoids ongoing fees levied by its principal and will rather have a predictable set of regulatory and compliance costs based on FCA fees and reporting requirements together with ongoing compliance time and / or professional fees. Furthermore, as a directly authorised firm grows, the costs per client or per transaction often decreases, whilst as an appointed representative, growth can mean increasing costs as a percentage of revenue as many principals levy fees proportionate to your revenue.
- Less Reliance on Principal’s Decisions
As an appointed representative, a business is subject to external factors beyond its control. If the principal experiences regulatory, financial, or reputational issues, it may impact the appointed representative’s ability to conduct its business. For example, if a principal firm faces regulatory scrutiny resulting in increased oversight and restrictions, an appointed representative’s business activities may be restricted, or it may even lead to termination of the relationship. Principal firms often set compliance standards and risk levels that appointed representatives must follow. Sometimes these do not align with a business’s specific client base, business model or strategic vision. By becoming directly authorised, a business can implement compliance protocols and manage risk appetite based on its own needs and the needs of its clients.
Common questions appointed representatives ask about direct authorisation:
Q: What are the costs of becoming directly authorised?
A: The costs include an initial application fee, ongoing FCA fees, and expenses associated with setting up compliance and risk management systems. There will also typically be professional fees associated with the application, for example legal, compliance, accounting, and ongoing compliance costs. The costs will depend on the business in question – please contact us for an indication of the legal costs of preparing an authorisation application for your business.
Q: How long does it take to become directly authorised?
A: The FCA typically takes 6 – 12 months to process a direct authorisation application, although this timeframe can vary based on the complexity of the firm’s business model and the quality of the application. It is possible for high quality applications to be approved more quickly than the statutory timescales.
Q: What resources will I need to become directly authorised?
A: You will need a variety of resources including a compliance officer or compliance team, systems and controls to manage regulatory requirements and possibly a compliance specialist to guide you through the FCA authorisation process. Additionally, you may need to invest in training and systems that support data protection, AML compliance and other regulatory requirements. You will also be required to meet ongoing requirements, including as to capital resources and the ability to submit reports to the FCA on an ongoing basis.
Q: Will I need a different skill set within my team?
A: Direct authorisation requires an enhanced focus on compliance, governance and risk management. Having experienced compliance personnel, either in-house or through external advisors, will be important to stay compliant with FCA standards and requirements.
Q: Are there situations where remaining an appointed representative is preferable?
A: For firms that are small or are just starting out, remaining an appointed representative can provide a cost-effective route to market. Some firms may find that the reduced regulatory burden and having oversight by a principal helpful for the firm to establish itself without the immediate need for direct authorisation.
Remaining as an appointed representative may be easier in the short term, but it can come with limitations and disadvantages that could restrict your firm’s growth and operational flexibility. The 5 reasons above provide information and explain some of the considerations you may have to take into account before deciding whether becoming directly authorised is the right route for you.
With a good track record of getting FCA applications approved quickly, Herrington Carmichael’s expert regulatory law team have the skills and experience to assist you with your FCA projects across a wide range of sectors including insurance, payment services, IFA, wealth management and funds.
If you are considering applying for FCA authorisation, please
contact us to speak to a member of our Regulatory Team.
