FCA publishes details of common application shortcomings for prospective asset managers

In some applications, the senior management lacked the competence and expertise to undertake the Senior Management Function (SMF) which they have applied for. Some candidates have not previously held the same SMF function and were, when questioned by the FCA, unable to explain the regulatory framework their business was subject to or could not explain how the firms proposed business model would work.

It’s a threshold condition for all FCA-authorised firms to have the mind and management in the UK including taking decisions about portfolios, distribution and the oversight of outsourced activities. It’s not enough to have back-office functions in the UK, or to have decision makers visit the UK periodically.

Some applicants fail to identify the risks posed by their business model or to adequately consider and evidence how they might mitigate those risks. Some firms have proposed business models which the FCA feel pose too high of a risk to retail clients, with the FCA highlighting that applicants who aren’t fully implementing or considering the Consumer Duty are unlikely to be successful.

Some applicants don’t consider that the firm will ultimately still be held responsible for all outsourced activities and should have adequate oversight of all outsourced activities.

Asset managers often exercise control over their clients’ assets and money, giving rise to potential conflicts. Some applicants fail to consider and identify all potential conflicts of interest prior to submitting their application and should have planned how to avoid and mitigate all identified potential conflicts of interest.

Some applicants seek exemptions from being covered by the Financial Ombudsman Service or Financial Services Compensation Scheme where this is not appropriate, increasing the time taken for the application to be decided.

The FCA expects all applicants to be ready, willing and organised to carry out the regulated activities for which they apply for authorisation to carry out. Some applicants were not ready when submitting their application, including firms that hadn’t recruited necessary SMF holders or arranged for sufficient regulatory capital to be in place. Some applicants sought to change their proposed business model significantly after submitting their application, and the FCA noted that such firms should consider withdrawing and reapplying at a later date when fully ready.