A guide to. FSA Authorisation

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April Washington
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1 A guide to FSA Authorisation

2 A guide to FSA Authorisation. Page 2. Contents Page 3 Page 3 Page 4 Page 6 Page 7 Page 8 Page 10 Applying for authorisation How IMS can help Completing the FSA application How long before authorisation? The costs associated with authorisation Frequently asked questions Contact information Introduction do I need authorisation? The Financial Services Authority ( FSA ) is the body which regulates investment business in the UK and, subject to certain very limited exemptions, any company wishing to establish an investment advisory, management, trading or fund placement/marketing operation in the UK will need to become authorised by the FSA before it can carry out any of these activities. It is an offence to carry out any of these activities without the proper authorisation.

3 A guide to FSA Authorisation. Page 3. Applying for authorisation The authorisation process is the means by which the FSA assesses whether persons seeking to conduct investment business in the UK are fit and proper to do so; have adequate experience and investment knowledge; have procedures and controls sufficient to protect both themselves and those with whom they conduct business; and meet minimum capital adequacy requirements. The process is an exercise in collating FSA forms and other documentation in support of the matters described above, and presenting this to the FSA. Although the FSA forms are in a prescribed format, structuring the information required by the FSA is not an obvious or intuitive process. Firms thus typically appoint experienced lawyers or regulatory consultants to complete the FSA application and to manage the application process through to completion. How IMS can help IMS has been offering a complete FSA application project management service since 1996 and with over 80 applications processed in 2007 alone, the firm is unarguably the most experienced compliance consultancy in the UK with respect to the application process for investment firms. Our dedicated application team comprises experienced compliance professionals, with regulatory and industry experience. Each application is managed by two consultants, ensuring that it is handled promptly and professionally with the resource and dedication required. Our process minimises the input required from the applicant, freeing up valuable resources to ensure the rest of the business is given the attention it deserves. As part of the application pack the FSA requires the applicant firm to demonstrate how it will meet its capital requirement. This is achieved by providing the FSA with a financial model in a prescribed format. We are able to provide advice and assistance on the preparation of this model, via our affiliate company IMS Buzzacott. In addition, we can offer introductions to other service providers, including tax advisers, legal advisers, auditors, administrators and prime brokers. We are also able to provide, via IMS Buzzacott, outsourced accounting, payroll, tax compliance and HR services.

4 A guide to FSA Authorisation. Page 4. Completing the FSA application The FSA Application pack consists of a suite of standard forms pertaining to the applicant firm itself, and further forms for the individuals and controllers behind the business. These are detailed below. The process of applying for authorisation requires the proper completion and submission of these forms together with a variety of documents and other information. (i) Checklist and Declaration Form Applicant firms must provide a schedule of documents provided to the FSA and must sign this form as a declaration that they are making a true and accurate application. (ii) Core Details Form This document requires factual information concerning basic details (e.g. address and contact details), legal structure, management, personnel and IT systems capabilities. (iii) Owners and Influencers Appendix This form details who owns/controls the applicant firm, the group structure and (if applicable) the multi-jurisdictional regulatory treatment of the group or specific group entities. (iv) Controllers Forms Controllers include any person, corporation or trust vehicle that has direct or indirect shareholding or voting rights in the applicant firm of 10% or above. The information required varies according to the type of controller. A reduced amount of information is required for individuals or entities that are already known to the FSA (either by virtue of being FSA authorised or being a controller of another FSA authorised firm). (v) Approved Persons Forms Approved Persons forms are to be completed by specified individuals including all directors, partners, investment managers, investment advisers, traders, the compliance officer and the money laundering reporting officer. Note that individuals applying to be controllers or Approved Persons will be required to answer a series of fitness and propriety questions. It is important to answer these to the fullest possible extent, as withholding information may significantly delay or even jeopardise the authorisation process.

5 A guide to FSA Authorisation. Page 5. (vi) Supplement Form The Supplement form contains a variety of sections designed to provide the FSA with information about the applicant firm s activities, resources and systems and controls arrangements. Specifically, the sections are as follows: Each form contains the following sections: Section 1 Regulatory Business Plan. This is a narrative description of why the applicant firm is being established, the activities to be conducted, the business strategy and the experience of key personnel. This is supplemented by a series of specific questions. In addition, the supplement for investment managers includes a specific section to be completed by hedge fund managers. Section 2 Scope of Permission Required. The Scope of Permission is the regulatory license for FSA authorised firms. This includes activities conducted, instrument types and client types. Section 3 Financial Resources. This section is used to provide information about the financial resources of the applicant firm. The applicant is required to advise how much capital it will employ in the business and must provide monthly financial projections showing how it will meet its financial resources requirement on an ongoing basis. As detailed above, our affiliate company IMS Buzzacott is able to assist with the construction of these projections. In addition, certain applicant firms are required to prepare an Internal Capital Adequacy Assessment Process ( ICAAP ). We can help firms to prepare their ICAAP which is appropriate to the nature and scale of the business. Section 4 Personnel. This details the individuals that are applying to the FSA to perform Controlled Functions. Section 5 Compliance Arrangements. This describes the applicant firm s proposed compliance and anti-money laundering arrangements. The section is accompanied by a risk based compliance monitoring programme. There is also a requirement for a compliance manual to be drafted. Section 6 Fees and levies. The FSA requests data to assist in its calculation of the applicant firm s fees and levies, once authorised.

6 A guide to FSA Authorisation. Page 6. How long before authorisation? The FSA is permitted by statute a maximum of six months to process a complete application and up to 12 months to process an incomplete application. In practice, for the past four or five years, the FSA has rarely taken more than 3-4 months to process an application. Where applications take longer, it is usually for one of the following reasons: the application has been poorly constructed, or is submitted to the FSA in an incomplete state; the application materials are revised during the FSA s vetting process; the business proposal is complex (e.g. innovative product offering); the applicant firm is considered high impact, for example, if initial funds under management is significant; the FSA takes issue with one of the controllers or key individuals within the business, with regards to their fitness and propriety. This is typically due to an adverse regulatory history; an individual associated with the business is high profile or is a politically exposed person ; or the applicant firm has an association with a jurisdiction that is of concern to the FSA, for example, countries perceived to have a high money laundering or terrorist financing risk. This association potentially includes ownership, key individuals and customer base.

7 A guide to FSA Authorisation. Page 7. The costs associated with authorisation The overall costs of establishing a regulated business, including legal and auditing costs, can be substantial. However the costs of making an FSA application, together with managing the application through to completion, should not be. (i) Application management costs The cost of the completion and management of a typical application is usually in the range of 12,000 to 20,000, depending upon its complexity (structure, number of staff, number and strategy of funds etc). This cost should include the preparation and drafting of the application pack and all associated compliance manuals and procedures (except the financial documents see below), submission of the pack, liaison with the FSA throughout the application process, continuous management of all correspondence and attendance at any required meetings. In addition to the cost of the application process, there will be costs associated with establishing the corporate entity that will be authorised and its group structure, and drafting various legal documents and agreements. (ii) FSA costs Depending on the complexity of the application, the FSA will charge a fixed fee of either 1,500 or 5,000 to process an application. This fee is payable by cheque at the time of submitting the application. There is no VAT payable on the FSA fee. (iii) Financial projections costs Applicant firms typically engage an accounting firm to compile the projections and calculate the regulatory capital. The charge for this will vary dependent upon the level of involvement required; however in most circumstances should not exceed 5,000. As detailed previously, our affiliate company IMS Buzzacott will be able to assist with this.

8 A guide to FSA Authorisation. Page 8. Frequently asked questions Q. Does my firm need premises before submitting the FSA Application? A. No. Firms do not need to have business premises until near the end of the application process. Q. What is the minimum number of staff required at authorisation? A. Typically, the minimum number of individuals that will become FSA approved with the firm is two. This is for two reasons. Firstly, the FSA s regulatory corporate governance regime (known as Senior Management Arrangements, Systems and Controls or SYSC ) requires that the sound and prudent management of the firm is overseen by at least two individuals with sufficient experience. (However, it is possible for one of these to be external to the firm e.g. a non-executive Director.) Secondly, for front office functions such as portfolio management or investment advisory, the FSA will require a contingency arrangement in the event that a key individual is incapacitated. This may require the firm to either have two individuals registered for the function, or to contract with another firm or individual for the provision of a contingency or locum service. Q. Will I have to sit exams? A. There are no prescribed examination requirements for individuals at wholesale firms (i.e. firms that do not deal with the retail public). Nonetheless, there is a high level requirement for all staff to have sufficient skills, knowledge and experience to perform their roles and responsibilities. In practice, this means that FSA applicant firms will need to demonstrate to the FSA that portfolio managers and investment advisers have: appropriate work experience for the role; and adequate knowledge of the regulatory environment in the UK. With respect to the latter, training may be required if there is a shortfall of knowledge. For example, if the individual is coming to work in the UK from overseas, or has not otherwise recently worked at an FSA authorised firm. IMS Consulting runs a training course designed to provide an overview of the key regulatory considerations for individuals at asset management and securities firms. The course can be used by firms seeking to assess individuals as competent vis-à-vis regulatory knowledge. The FSA is unlikely to require pre-authorisation training for any other staff (e.g. executive, compliance, back office or support personnel). However, there are certain regulatory training requirements for staff at authorised firms, for example, anti-money laundering training.

9 A guide to FSA Authorisation. Page 9. Q. What are the Capital Requirements? A. The process for determining a firm s capital requirements varies depending upon the activities conducted. Typically, an investment manager has a capital requirement of 25% of annual fixed overheads. Investment advisory firms typically have a capital requirement of no more than 50,000. Certain venture capital/private equity firms (in particular those that manage and operate unregulated collective investment schemes) may have a capital requirement of as little as 5,000. Note that certain firms are required to complete an Internal Capital Adequacy Assessment Process ( ICAAP ). As a result, some firms may be required to increase the level of capital in the business. Q. How long does it take to prepare the Application? A. It usually takes about four weeks due to the applicant fine tuning its plans and arrangements and also on account of logistical considerations, for example, company formation. However, the time taken to complete can be significantly reduced if all or a majority of the required information and documentation is available at the outset. Q. What is IMS success rate for project managing FSA applications? A. Applicant firms do not pass or fail the authorisation process as such, and 99% of the applications that we project manage are successfully completed. Invariably there are issues with some firms that cause the FSA to vet the application with greater scrutiny. However, this usually means that the time taken to process the application increases, as opposed to the application ultimately failing. Where firms do not become FSA authorised, it is either because the firm decides for commercial reasons not to proceed or in a very small number of instances the firm is unable to demonstrate to the FSA within the statutory time frame that they fulfill the threshold conditions for approval. In these instances, the typically FSA advises the firm to withdraw the application; otherwise the application may be officially rejected, which is a matter for public record. Q. Can I market a fund prior to FSA authorisation? A. The answer is a complex one and will depend upon such factors as the precise nature of the marketing activities to be undertaken and the types of persons to whom you wish to market. Please check with your consultants or legal advisors prior to conducting any marketing activities.

10 A guide to FSA Authorisation. Page 10. For more information about the FSA application process or other services provided by IMS, please contact us at: FSA application project management and compliance services: IMS Consulting Ltd Tenterden House 3 Tenterden Street Mayfair London W1S 1TD Telephone +44 (0) mail@imsconsulting.co.uk Accounting (including financial projections for FSA applications), business administration and taxation services: IMS Buzzacott LLP 12 New Fetter Lane London EC4A 1AG Telephone: +44 (0) enquiries@imsbuzzacott.co.uk IMS Consulting Limited, May 2008

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