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FCA Authorisations: How are things changing? Are things improving?

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The FCA is focusing on improving its authorisation processes. Taking steps to overcome some of the problems firms have experienced in the last few years, it has taken on more staff, improved technology and digitized parts of the authorisation process.  It has also recently appointed a new Executive Director for authorisations, Sheree Howard.

We are starting to see the results in terms of timescales.  Over the last 2 quarters, there has been an improvement with the FCA hitting its target processing times for approximately 95% of applications from e-money and payments firms.

We should also start to see the FCA’s new secondary objective on growth and competitiveness impacting authorisations.  The FCA is seeking to give more support to firms who need permissions and Sheree Howard has said that she will be seeking views on how the FCA can improve its authorisation process.

Over the past few years, the FCA has been publicising the increased rates of firms denied authorisation, or withdrawals, to emphasize its stricter approach.  With its new secondary objective to promote growth and competition, the manner in which the FCA handles the balancing act, to be seen as protecting the market and consumers whilst also encouraging growth, will be under closer scrutiny.

Many in financial services have been concerned that some elements of the FCA’s more stringent approach may not always be justified by reductions in financial crime and money laundering or consumer protection.  That in its the drive to change its reputation to a tougher regulator, it may have not have been properly considering the potential negative impact on some consumer groups and market sectors.

With the introduction of the secondary objective on growth and competitiveness, and the recognition of the impact of authorisations on this objective, we should hopefully see a shift, not in terms of being less stringent, but in finding ways of working that maintain regulatory standards whilst also focusing on growth, innovation and competition.

So, if you’re looking to become authorised by the FCA, what will this mean and what is expected?

What’s involved in becoming authorised by the FCA?

Regardless of the changes taking place at the FCA, firms looking to become authorised as e-money or payments institutions still need to ensure they have a good understanding of the regulations, have adequate frameworks, controls and documentation, have robust technology testing, resilience and wind down plans, adequate financial resourcing and the appropriate skills and experience on their team, including an appropriately resourced UK-based team for overseas firms looking to expand.

Below we have given a brief overview of what is needed to gain authorisation from the FCA.

Understanding the Regulatory Landscape

To successfully obtain FCA authorisation, it is essential to have a comprehensive understanding of the regulatory landscape governing the payments industry and how it applies to your proposed business model. The Payment Services Regulations (PSRs), the Electronic Money Regulations (EMRs) and the Money Laundering Regulations outline the specific requirements and obligations set by the FCA. These regulations encompass various aspects, including licensing expectations, conduct of business rules, safeguarding requirements and reporting obligations.

To ensure compliance, firms must thoroughly familiarise themselves with the regulations applicable to their business models. This includes understanding the different types of licenses available, such as payment institution (PI) licenses or electronic money institution (EMI) licenses. Each license category has its own specific criteria and regulatory obligations that need to be met.

Firms also need to understand the FCA’s approach and guidance, including the FCA Handbook and its Payments Services and Electronic Money Approach Document, which can be found on its website.

If you are partnering with a consultancy firm, make sure they provide workshops and training to help you ensure that you have a good understanding of the regulations that apply and, more importantly, how they apply to your specific business model and services.  Your senior team will all need to have understand the obligations on the firm and be able to prioritise regulatory compliance and its impact across the business.

Additionally, firms should stay updated on regulatory changes and developments in the payments industry. The FCA regularly publishes guidance and updates, and it is important to review and adapt compliance practices accordingly.

Adequate Financial Resources

Firms need to be able to demonstrate sufficient financial resources to operate in the payments industry. The exact capital requirements depend on the license category and the nature of the firm’s activities. It is crucial to conduct a thorough assessment of your financial position and ensure that you meet the minimum capital requirements.

To demonstrate financial adequacy, firms should consider the following:

  • Capital Planning: Develop a robust capital planning strategy that takes into account potential risks and contingencies. Ensure that you have sufficient capital buffers to withstand unforeseen events or market fluctuations.
  • Funding Sources: Identify reliable and stable funding sources to support your ongoing operations. This may include equity capital, debt financing or strategic partnerships.
  • Financial Reporting: Implement robust financial reporting systems that provide accurate and timely financial information. Regularly review your financial statements and ensure compliance with accounting standards.

Firms also need to decide how they will meet the Safeguarding of client funds requirement.  Your policy should include a full understanding of the responsibilities you will have, alongside robust reconciliation processes.

Financial projections, and their stress testing, are another important part of your application.  The FCA provides additional guidance in respect of what Financial information it wants to see on its website.  You will need to present realistic financial projections that demonstrate the firm’s ability to meet capital adequacy requirements and sustain its operations. This includes providing detailed financial statements, cash flow projections and capital planning strategies. The FCA expects firms to have adequate financial resources to support their business activities.

Regulatory Framework

Preparing a robust and comprehensive regulatory framework is crucial for a smooth authorisation process. The FCA requires firms to submit detailed documentation to demonstrate their fitness and propriety, financial soundness, and compliance with regulatory requirements.

When preparing your application, consider the following key areas:

  • Business Plans: Clearly articulate your business model and programme of operations, target market, products or services, and any innovative aspects of your operations. Including a flow of funds diagram is also a key aspect of the Plan. Provide a detailed analysis of the market landscape, competitive positioning, and growth strategies. It is important to showcase a strong understanding of the market and a viable long-term business plan.
  • Governance Structure: Present a well-defined governance structure, highlighting key individuals responsible for regulatory compliance, risk management and oversight. Outline reporting lines, decision-making processes, board responsibilities, committees and any outsourcing arrangements. The FCA places significant emphasis on senior management’s competence and suitability, so ensure that you provide comprehensive information on their backgrounds and experience.
  • Risk Management Framework: Develop a robust risk management framework that identifies, assesses and mitigates key risks associated with your business operations. This includes conducting a thorough risk assessment, implementing appropriate risk controls and establishing effective monitoring mechanisms. Provide a clear overview of your risk appetite and mitigation strategies to demonstrate a proactive approach to risk management.
  • Compliance Policies and Procedures: Develop comprehensive compliance policies and procedures that address key regulatory requirements, such as anti-money laundering (AML) and Know Your Customer (KYC) obligations (see below). These policies should include all aspects of compliance including complaints, financial promotions and wind down plans.
  • Consumer Duty: One crucial aspect to consider when preparing your application, is compliance with the Consumer Duty. The FCA’s Consumer Duty sets expectations for firms to act in the best interests of their customers, prioritise consumer protection and deliver positive customer outcomes. As part of your application, demonstrate how your firm is committed to meeting the Consumer Duty requirements. Outline the steps you have taken or plan to take to ensure customer-centricity, fair value and effective customer support. Highlight any policies, processes or measures you have implemented to align with the principles of the Consumer Duty. For everything you need to know about the Duty and the requirements for your business, check out our dedicated FCA Consumer Duty section.

Compliance with AML and Financial Crime Regulations

AML and financial crime compliance is a top priority for the FCA. Firms operating in the payments industry are particularly vulnerable to money laundering and terrorist financing risks. To obtain FCA authorisation, firms must demonstrate a strong commitment to preventing financial crime and implementing effective AML measures.

Key considerations for AML and financial crime compliance include:

  • AML Policies and Procedures: Develop comprehensive AML policies and procedures that meet the regulatory requirements. This includes implementing robust customer due diligence processes, screening arrangements, customer risk assessment, transaction monitoring systems and ongoing due diligence reviews and risk assessments.
  • Reporting Suspicious Activity: Establish clear procedures for reporting suspicious activity to the relevant authorities. Train your staff on recognising and escalating potential money laundering or terrorist financing activities.
  • Ongoing Monitoring: Implement systems and controls to monitor customer transactions and detect any unusual or suspicious patterns. Regularly review and update your risk assessment processes to ensure they remain effective.
  • Staff Training: Provide regular training to your staff on AML obligations, red flags, and reporting procedures. Ensure that all employees understand their responsibilities and the importance of compliance.
  • Financial Crime Risk Assessment: Ensure that business activities are regularly reviewed against possible financial crime risks, appropriately assessed against probability and impact and adjusted against the firm’s risk mitigation systems and controls.

The FCA expects firms to demonstrate a strong commitment to preventing financial crime and maintaining the integrity of the payments system.

Robust Technology Infrastructure

In today’s digital age, a robust technology infrastructure is vital for firms operating in the payments industry. The FCA expects firms to have reliable systems in place to ensure the secure and efficient processing of payments.

Consider the following best practices for technology infrastructure:

  • Payment Systems: Implement secure and resilient payment systems that meet industry standards. This includes secure transmission protocols, encryption mechanisms and effective fraud detection and prevention measures.
  • Data Protection: Safeguard customer data in accordance with data protection regulations. Implement strong data privacy controls, including access controls, encryption and regular data backups.
  • Cybersecurity: Establish robust cybersecurity measures to protect against unauthorised access, data breaches and cyber threats. Regularly conduct vulnerability assessments and penetration testing to identify and address potential weaknesses.
  • Operational Resilience and Business Continuity: Develop a comprehensive business continuity plan to ensure uninterrupted operations in the event of disruptions or emergencies. This includes redundant systems, backup facilities, and disaster recovery procedures.

Ongoing Compliance and Regulatory Monitoring

Obtaining FCA authorisation is not the end of the compliance journey; it marks the beginning of an ongoing commitment to regulatory compliance. Firms must establish robust compliance monitoring processes and stay updated on regulatory changes and developments.

Key considerations for ongoing compliance and regulatory monitoring include:

  • Compliance Monitoring Plan: Develop a comprehensive compliance monitoring plan that covers all regulatory requirements applicable to your business. Regularly review and update the plan to reflect changes in regulations or business operations.
  • Employee Training: Ensure all employees receive regular training appropriate to their role and responsibilities within the business.
  • Regulatory Updates: Stay informed about regulatory changes and updates issued by the FCA and other relevant authorities. Establish processes to monitor and assess the impact of regulatory changes on your business and implement necessary adjustments to remain compliant.
  • Independent Audits: Consider engaging independent external auditors to conduct periodic compliance and regulatory audits. This ensures an objective assessment of your compliance practices and identifies areas for improvement.

How Neopay can help

With our expertise in regulatory compliance and deep understanding of the FCA requirements, Neopay can provide valuable support and guidance throughout the authorisation process. Our team of experienced professionals can offer tailored guidance and support in establishing robust compliance frameworks, implementing efficient processes, and leveraging technology solutions to streamline compliance operations.

We also provide a full range of support options to help firms maintain compliance once they are authorised, including audits, training and virtual compliance support.

Contact us today to learn how our comprehensive compliance solutions can help you stay on top of your regulatory obligations while driving operational efficiency and growth.

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