28 days later: “Use it or lose it” gathers pace…

28 days later: “Use it or lose it” gathers pace…

On Thursday 19th May 2022 the UK Financial Conduct Authority (“FCA”) announced the publication of Policy Statement PS22/5. This follows the entry into force of Schedule 6A of the Financial Services and Markets Act (“FMSA”), added by the Financial Services Act 2021. This equips the FCA to cancel or vary Part 4A FSMA permissions without:

  • application or consent from a firm; or
  • having to wait 12 months per section 55J FSMA.

When is the FCA likely to use its new powers?

The objective of the new power is to enhance consumer protection. If a firm does not carry on an activity for a lengthy period, this may:

  • result in declining levels of experience within the business to support the activity;
  • see a deterioration in the firm’s systems and controls to engage in the activity; and
  • mislead clients as to the status of any unregulated services that it offers.

The FCA reserves the right to utilise the Schedule 6A powers in a broad range of situations. For example, evidence of the following could prompt their use:

  • no revenue reported for an activity in annual fee tariff data. This includes activities performed by appointed representatives once the changes proposed in Consultation Paper 21/34 have been adopted: “based on that data, we may choose to ask principals why they have not suspended or terminated ARs that conduct no regulated activities”;
  • a firm is not engaging with the complaints processes outlined in the Dispute Resolution (“DISP”) section of the FCA’s Handbook; and
  • adverse compliance history.

I work for a firm that exclusively serves wholesale clients. Does the FCA’s use of the word “consumer” in the context of the implementation of Schedule 6A mean that it cannot be used cancel or vary my firm’s permissions?

No. The FCA has stressed that it can use the Schedule 6A powers to remove permissions from firms serving wholesale or retail clients, corporates, or natural persons.

Two strikes and you’re out…

If the FCA believes a firm is not using a regulatory permission it will provide two warnings.

The first warning will ask the firm for a written response, to be provided within 14 days. The purpose of this warning is to give the firm an opportunity to persuade the FCA of its intention to continue using a permission. Any statement of such an intention must be supported by concrete plans to carry on an activity: (a) compliantly; and (b) soon.  The FCA recognises that innovation and development is time consuming. It also understands that prevailing market conditions may render a firm ‘blameless’ in any failure to use a permission. In either case, the onus is on the firm to articulate its position.

If, after the first warning, the FCA deems that the respondent firm has not taken appropriate action, the FCA will publish second warning in the form of a public notice. In this notice, the FCA will declare that it appears the firm is not using its permission.

The FCA can cancel or vary a firm’s permission if 14 days have elapsed from service of the second warning.

My firm has not used one of its permissions and has no current plans to use them. What should we do?

You should apply to cancel the permission by completing and submitting a Variation of Permission (“VoP”) application in Connect.

How can my firm demonstrate good governance in managing its permissions?

The FCA stresses in PS22/5 that the powers enshrined in Schedule 6A are not disciplinary in nature. As such, they do not empower the FCA to act against individuals. If the FCA believes an investigation into the actions of individuals is warranted, this will take place separately.

Notwithstanding the above, the FCA perceives permission management to form a key part of senior managers’ obligations under the Senior Managers Regime.

To demonstrate good governance, it is recommended that a firm:

  • conduct a review of its permissions at least annually or when material changes to its business are proposed. Logically, this review would be aligned with the firm’s annual attestation to the FCA that the information held on its Financial Services Register entry is accurate. Any findings should be reported to the firm’s management body, e.g. the board;
  • ensure the findings are discussed by the firm’s management body in a recorded meeting. Ideally, any discussions would form part of the internal capital adequacy and risk assessment process, particularly where the management body is reviewing its business strategy;
  • make the decision to remove a permission in a record meeting, e.g. by passing a director’s resolution; and
  • consider any impact on the firm’s governing documents. For example, will the firm’s objectives in its memorandum and articles of association (or equivalent) also need to be tweaked once the permissions have been removed?

My firm has applied to cancel a permission. What now?

In readiness for cancellation, the firm will also need to:

  • determine whether it needs to make any amendments to: (a) internal and (b) external (client facing) policies and procedures to remove references to the permission that is to be withdrawn, e.g. in the firm’s Compliance Manual;
  • communicate these changes to all business units, particularly client facing staff. For example, if a firm has applied to cancel an advice permission, it is very important that the firm explains the consequences of this to staff that may have previously been involved in giving personalised recommendations to clients; and
  • inform all relevant clients of the impending cancellation of the permission. For example, a client may have previously taken services from the firm that will formally cease to be offered once the permission has been cancelled. The de facto situation may be that the firm has not offered a service for a while. However, some clients that occasionally used a service may not be aware of this. The cancellation may also represent a good opportunity to update clients’ terms of business and related documentation, e.g. costs and charges disclosures.

Remember, engaging in a regulatory activity without the requisite permissions is a criminal offence. Good governance and effective communication throughout the cancellation process is therefore essential.

My firm is ‘dormant’ and is thinking of selling its permissions. Is this acceptable?

This is unlikely to be acceptable to the FCA. There is a high risk that the FCA will perceive such a move as an attempt to circumvent its detailed authorisation processes. Accordingly, there is a strong possibility that the FCA would decline to consent to a change-of-control in such circumstances.

Will the new power apply to payment services providers or electronic money issuers?

No. The power is only available in context of permissions granted pursuant to Part4A FSMA.

My organisation acts as an appointed representative (“AR”) to a firm that has had its relevant permissions removed pursuant to the new Schedule 6A powers. What happens to us?

Your organisation will have to cease performing the regulated activities that were underpinned by the permissions that have been removed.

Summary

Permission zombies are now firmly within the regulator’s sights. A proactive approach to permission management can help mitigate against a Schedule 6A apocalypse!

Originally published by Thomson Reuters © Thomson Reuters

About

A.C.Culley & Co. has extensive experience of regulatory interactions. A.C.Culley & Co. can assist firms in drafting and submitting applications to cancel or vary their Part IV permissions at competitive rates. For more information, please contact us.

References

2022. FCA strengthens consumer protection by speeding up removal of firms that do not use their regulatory permission. Financial Conduct Authority, available at: https://www.fca.org.uk/news/press-releases/fca-strengthens-consumer-protection-speeding-removal-firms-do-not-use-regulatory-permission [last accessed 23rd May 2022].

2022. New cancellation and variation power: Changes to the Handbook and Enforcement Guide. Financial Conduct Authority, available at: https://www.fca.org.uk/publication/policy/ps22-5.pdf [last accessed 23rd May 2022].

2021. FCA reminds firms to regularly review regulatory permissions. Financial Conduct Authority, available at: https://www.fca.org.uk/news/statements/fca-reminds-firms-regularly-review-regulatory-permissions [last accessed 23rd May 2022].

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