A small FCA regulated business can often be operated on the basis of good will, with the founder working long hours in the early days of the business. However, as a business grows in terms of employees, customers and products then the business will require more structure, more evidence of compliance and more people to perform compliance tasks.
Widening Activities Needs Full Permission
In order to carry out a wider range of regulated activities a company with limited permission would typically need to apply for full (‘standard’) permission for all those activities it wishes to carry out in addition to those already covered. This is a formal variation of permission application and not simply an ‘upgrade’ of the firm’s current permission. As with the initial permission application, a company applying for full permission would need to demonstrate that it has adequate systems and controls in place to manage its regulated activities as well as sufficient financial resources to meet its obligations.
SM&CR Scales With Size
All FCA-authorised firms will fall into the Senior Managers and Certification Regime (‘SM&CR’) of some description and the level of requirement will grow with the size of the business. Many small firms are in the ‘limited scope’ category of SM&CR and consequently have few requirements in respect of Senior Managers and Certificates. However, as firms grow, there are various thresholds which need to be met (e.g. headcount, income, balance sheet size) and at which the firm’s SM&CR category will change (e.g. from ‘limited scope’ to ‘core’ to ‘enhanced’). The FCA’s guidance on this sets out the various categories of SM&CR in growing firms and the additional Senior Manager functions, formal statements of responsibilities and certification requirements for larger numbers of staff.
When a Dedicated Compliance Role Becomes Necessary
While it is common for founders to manage compliance while establishing a new business, growth is usually rapid and the risk can increase significantly when the firm reaches client numbers and a range of products. It is generally required that firms have a named Compliance Officer where they carry out regulated activities. Additionally, where the business also undertakes activities covered by the anti-money laundering regulations, it will require a Money Laundering Reporting Officer who has sufficient time to carry out the role properly.
More Frequent Regulatory Reporting
Although the returns and reports submitted by smaller firms are generally relatively straightforward, a firm with a growing client base will typically need to submit more returns on a more frequent basis and with increasing amounts of detail. For example, a larger firm will need to complete financial resource reports, submit complaints data and complete specific REP forms in respect of the activities it is permitted to carry out. Large numbers of returns must be submitted on time otherwise they will attract prompt attention from the regulator. See also FCA Compliance Consultants.
Informal Practice Needs to Become Documented Policy
As a small FCA authorized business, it is easy to manage a compliance regime based on shared understanding of how things should work. However, as the business grows to include more staff, offices and higher volumes of transactions, shared understanding is unlikely to be sufficient. Instead the regulator expects written policies and procedures supported by training records and audit trails. Moreover, there must be evidence that all staff have read and understood the relevant parts of policies and procedures. To help, many firms reference the FCA’s Handbook when developing policies and procedures in order to understand the rules behind the requirements.
Consumer Duty Monitoring Grows With Customer Numbers
The FCA’s Consumer Duty applies to all FCA authorized firms from the date they receive authorization and, whilst a firm with a few clients can review the outcomes from those few cases, as a firm grows and the range of products it sells increases, the need for ongoing monitoring of customer outcomes increases and needs to be structured in some form, such as regular outcome reports across all products and customer groups. Board and senior managers need to review this on a regular basis not just for an annual review.
Capital Requirements Step Up at Growth Thresholds
Capital requirements also are varied between types of financial services. Many of the FCA authorization requirements are based on a minimum amount or % of income or of authorized capital, and vary depending on the amount of growth of the firm. At certain levels of growth (e.g. balance sheet size), a firm can move from one prudential category to another. These categories vary by financial services type and have their own prudential sourcebook, requiring the firm to also comply with a variety of capital, liquidity, and reporting requirements, as dictated by the FCA and the Bank of England’s Prudential Regulation Authority.
Knowing When to Bring in Outside Help
While a firm is growing and has a lot of work to do, in most cases it will look for support. There is a big amount of work that needs to be done with respect to permissions, reporting requirements and policies and a lot of firms will engage an FCA Compliance Consultant. This person will work for multiple firms and be able to indicate when a new threshold will be introduced.
However, growth brings new compliance obligations. Knowing when these are triggered is key to managing each stage successfully and avoiding any last minute problems with the FCA.
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