On 16 April 2024, the Financial Conduct Authority (FCA) published a new webpage on common errors made by firms when applying for authorisation to operate in the asset management sector. The webpage outlines common issues with recent applications, and states that firms wishing to operate in the sector should consider these points, alongside the relevant information for their type of firm.

The FCA also notes that how quickly it determines applications for new authorisation or variations of permission is largely based on an application’s completeness and clarity. Between April 2023 and April 2024, 18% of applications were withdrawn due to the concerns set out below, or rejected by the FCA (due to poor quality information).

The common errors set out on the webpage, which firms should avoid in applications, are:

  • Senior management lacking experience or qualifications

The FCA states that where firms failed to meet its expectations in relation to their senior management arrangements, this was typically because proposed senior managers either lacked the competence and expertise to undertake the functions for which they had applied, or did not hold an appropriate level of seniority in the firm.  

  • Office locations outside the UK

The FCA expects the ‘mind and management’ of a firm to be in the UK, taking business decisions about portfolios and distribution, and overseeing outsourced activities, in the UK on a day-to-day basis. It flags that is not enough for a firm to do just its compliance or administration in the UK, or to have the people who make business decisions fly in from time to time.

  • Business models which expose clients to risk

Whilst the FCA accepts that all business models pose risk, it notes that often applicants do not identify the risks that their business model poses, or adequately consider and evidence how they might remove or mitigate those risks. Firms are also reminded that, when engaging with retail clients, the FCA would expect them to demonstrate how they apply the Consumer Duty, and applicants that cannot do so adequately are unlikely to be successful in their application. The FCA also highlights that it has seen applicants that seem to have structured their business model in a way that is intended to avoid rules that would give clients the expected level of protection.

  • Outsourcing: underestimating the firm’s accountability

In some applications, the FCA has seen firms not considering the relevant rules, the applicant’s responsibilities, and the impact on their business when outsourcing. It warns that, while it understands firms will outsource certain activities to third parties, applicants should be aware that despite those activities being outsourced, responsibility and oversight for those activities will still sit with the applicant, and they will also be accountable for ensuring compliance with the relevant rules.

  • Conflicts of interest: failing to identify concerns

Firms should ensure they consider potential conflicts of interest (which for asset managers can typically arise between the interests of the client, the firm and related parties) adequately in their applications. The FCA notes that it is not its role to identify potential conflicts or the risks of such conflicts to the business, but that if it does, that would raise concerns as to whether the applicant is aware of the risks posed by its business and how to mitigate them.

  • Redress: avoiding appropriate schemes that protect consumers

The webpage flags that some asset managers seek exemption from the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS) when this is not appropriate. This can increase how long it takes the FCA to conclude its assessment. For example, firms sometimes assume that if they don’t have retail clients, they will not be in scope of FOS or FSCS; however, this is not necessarily the case. To avoid delay, before applying, a firm should consider the Handbook rules in DISP and COMP to identify whether it is likely to do business with an ‘eligible complainant’ (in the case of FOS) or an ‘eligible claimant’ (in the case of FSCS).

  • Unready, unwilling or unorganised applicants

The FCA expects applicants to be ready, willing and organised to carry out the activities they plan to undertake. The FCA has observed examples of firms that have submitted applications but were not ready, willing and organised; for instance, they had not recruited the relevant SMF holders or arranged for sufficient capital to be in place. While the FCA says it understands that circumstances can change during the lifecycle of an application, it emphasises it is not willing to put applications on hold for extended periods or to accept significant changes to the proposed model (for example, changes in target market).

If there are significant changes to a firm’s proposed application, the firm should consider withdrawing the application and re-applying at a later date. The FCA considers this to be better than proceeding with a poor-quality application that does not meet its standards. Firms that withdraw an application may re-apply at a later date, once they have addressed any concerns. In addition, the FCA highlights that it would expect applicants to make it aware of any information that it would reasonably expect at the outset and during the life of an application (see COCON 2.2.4

Next steps

Before submitting an application, the FCA advises firms to review the relevant supervisory correspondence and pages for its business model. If a firm meets the criteria, it can also submit a request to the FCA’s pre-application support service.