Are you meeting Threshold Conditions?

To become, and remain, authorised regulated firms must meet Threshold Conditions at all times. This article looks at some trends and changes that mean you really do need to be paying attention to how you are meeting Threshold Conditions.

FCA is deauthorising firms not meeting Threshold Conditions

The number of final notices issued by the FCA to authorised firms who were not meeting Threshold Conditions have peaked over the past five years. Shown by the red columns in the chart below.

All of the firms receiving one of these final notices had their licence or application to conduct regulated activities cancelled or refused. They could not continue in business as a regulated firm.

Once this happens it becomes extremely difficult for these firms to regain authorisation because they have shown an inability to meet the basic conditions for authorisation.

Changes to how FCA decides if you are using your licence

You may have heard about the “use it or lose it” review the FCA has been running this year. Focusing in on firms not using their regulatory permissions. More information here.

The Treasury published a statement “deauthorisation” which changes the way that the FCA ejects firms that it believes have stopped regulated activities.

The statement says that the FCA can consider a firm to have stopped providing regulated activities if:

  • regulatory fees have not been paid

  • regulatory returns are not filed

  • FCA has not been notified about a change of business name, address, or phone number

  • FCA does not receives replies to its correspondence

  • Mail is returned to FCA undelivered

This will speed up the process under which FCA cancels permissions. It does include a safety net that the FCA could reinstate a licence if certain other criteria are met including an attestation that Threshold Conditions are being met. So more emphasis again on how you are meeting Threshold Conditions, and consider in that situation how you would put something together to give a senior manager confidence to sign such an attestation under what it is fair to assume a fair bit of time pressure.

Application of The Threshold Conditions in the Temporary Permissions Regime (TPR)

If you are a TPR firm you may recall that you were not asked to demonstrate that your firm satisfies threshold conditions on entry to the TPR.

However, once in the TPR you have a notification obligation to tell the regulators if you become aware that the business has not met one or more threshold conditions, may have done so, or may do so in the foreseeable future.

You should be aware that the Threshold Conditions are an area of rules that can be directly applied by PRA and FCA outside the UK.

What are the Threshold Conditions?

The conditions for FCA authorisation are:

1. Your head office and management must be in the UK, if you are incorporated in the UK

2. The business must be capable of being effectively supervised by the FCA in all circumstances. You need to think about the nature and complexity of the products and services you provide as much as how your business is structured.

3. You must have appropriate resources at all times. This means meeting the minimum capital requirements for your firm as much as it means thinking about risks to continuity of services provided, impact of being part of a group of firms, and ability of the business to comply with regulations.

4. The business must be suitable. This allows FCA to look at connection with other parties, the way the business is organised and managed, compliance with FCA rules as much as if those in charge have adequate skills and experiences, and act with probity. The latter point is intentionally broader than SMCR. Where management is considered to not be acting with probity the firm will be held to account, including removal of permissions and/ or action against the individuals.

5. The business model or strategy must be appropriate for the activities you are undertaking. This requirement relates to the nature and scale of your business, risks to continuity of services provided, impact of group membership, and ability to comply with regulations.

The conditions for PRA authorisation are:

1. Legal Status. Generally you must be a body corporate or partnership.

2. Location of offices. Your head office and registered office must be in the UK. In particular, your "mind and management" to be in the UK, if the business is incorporated in the UK.

3. Business to be conducted in a prudent manner and, in particular, maintain appropriate financial and non-financial resources. This brings in matters which are relevant in assessing the effect that the firm 's failure might have on the stability of the UK financial system and so introduces the concept of resolvability into the conditions.

4. Suitability: The firm must be fit and proper, and be appropriately staffed. Under this threshold condition the PRA can assess the manner of a firm 's compliance with the rules (not a negotiation). Where the PRA considers management is not acting with probity the firm will be held to account, including removal of permissions and/ or action against the individuals under SMCR.

5. The firm must be capable of being effectively supervised by the PRA in all circumstances. This includes the nature and complexity of your products, activities, as much as organisational structure.

Actions and Next Steps

Make sure that you have a clear line of sight over how your business is meeting threshold conditions. Extend that to standing data, which is the updates to your company name, address, and phone number. Note that the FCA register is updated with a warning to consumers if you have not updated your data in the past 12 months.