Guest post from Pragmatic Compliance, leading UK FCA compliance consultancy.
Authorisation is generally the process to formally recognise the activities of a business in a state usually overseen by a government body. There may be a few extra permissions granted to the business depending on the nature of that particular business. Different businesses require different permissions and on different levels. The verification process is carried out through clearly defined processes and such include the verification of identity, permits, capital and certain minimum requirements as defined by the law of that particular country. The government may also grant permission to other independent companies to carry out the authorisation process.
Sometimes not all businesses require authorisation therefore it is important to first inquire and examine whether your business requires authorisation in order to carry out regulated activities. For smaller firms, this would include intermediaries selling investments and/or home finance activities and/or insurance. The specified investments and activities are laid out in the Financial Services and Markets Act 2000 (Regulated activities) Order 2001 (RAO), which is secondary legislation under FSMA.
FSMA is tasked with the oversight and regulation of financial markets and services in the United Kingdom. Any person who carries out a regulated activity in the UK must be authorised by the FCA or exempt (an appointed representative or other exception) as stated under Section 19 of FSMA. A copy of FSMA as well as related and secondary legislation can be found on the Treasury’s website. This version however, does not include amendments made to it by subsequent legislation. It is important to note that breach of section 19 may be a criminal offence that is punishable on indictment by a maximum prison sentence of two years and/or a fine.
Specified activities as defined in Part 2 of the RAO comprise:
- Issuing e-money
- Managing investments
- Entering into a home finance activity
- Administering a home finance activity
- Entering funeral plan contracts
- Lloyd’s market activities
- Advising in investments
- Advising on home finance activities
- Accepting deposits
- Effecting or carrying out contracts of insurance as principal
- Dealing in investments (as principal or agent)
- Arranging home finance activities
- Operating a multilateral trading facility
- Arranging deals in investments
- Safeguarding and administering investments
- Establishing collective investment schemes
Assisting in the administration and performance of a contract of insurance
- Establishing stakeholder pension schemes
- Sending dematerialised instructions
- Providing basic advice on stakeholder products
- Agreeing to do most of the above activities
Specified investments as defined in Part 3 of the RAO comprise:
- Instruments giving entitlement to investments
- Certificates representing certain securities
- Units in a collective investment scheme
- Rights under a stakeholder pension scheme
- Rights under personal pension scheme
- Electronic money
- Rights under a contract of insurance
- Instruments creating or acknowledging indebtedness
- Sukuk (Shariah compliant debt instruments)
- Government and public securities
- Contracts for differences
- Lloyd’s syndicate capacity and syndicate membership
- Rights under funeral plan contracts
- Rights under regulated mortgage contracts
- Rights under a home reversion plan
- Rights under a home purchase plan
- Rights to or interests in anything that is a specified investment listed, excluding ‘Rights under regulated mortgage contracts’, ‘Rights under regulated home reversion plans’ and Rights under regulated home purchase plans’
As stated earlier, all businesses are different depending on how they are run and how big the organisations are, as such, there are different profiles for each. There are several standard permission profiles containing regulated types of investment and activities specifically developed for small firms. If at all the developed packs do not fit your firm’s needs, you will probably want to construct your own. There are obvious advantages for constructing your own since you will probably avoid all redundant activities and investments that are carried by the pre-defined packs. The activities and specified investment types that are available for regulation are defined in detail in chapter 2 of the Perimeter Guidance Manual (PERG).
For business to be carried out smoothly, there are certain laws and regulations that will govern its activities, generally referred to as business laws. These laws clarify on the limits and thresholds of business activities and for a business to be viable they are obligated to follow these laws. Under section 22 of the FSMA, for an activity to be a regulated activity, it must be carried on ‘By way of business’. FCA guidance on the business element can be found in PERG 2.3.
It cannot be guaranteed that all businesses will have similar activities and investments as such exceptions may be granted. Exclusions are provisions that render activities that would otherwise be regulated become unregulated. If you chose to rely on exclusion for your business activities, you will not require FCA authorisation to carry the activities out.
Some of the few examples of exclusions include:
- Overseas persons exclusion
- Introducer exclusion
Who is exempt from authorisation?
As stated earlier, authorisation may not be meant for everybody. Authorisation differs with how big the company is and the type of activities they wish to carry. There are a few elements that are absolutely exempt from authorisation under the relevant factors as put into perspective. Such an element is a person who is appointed as a representative. Other exceptions include:
üA local authority or certain kinds of housing bodies carrying on insurance mediation or mortgage activities
üA firm deem as professional (i.e. accountants or actuaries, firm of solicitors) carrying out certain regulated activities that are incidental to its particular business.
A financial promotion is generally an invitation to a firm or business to engage in investment activity. This may be offered by the designated government bodies or directly by the government as defined under section 21(8) FSMA as:
- Entering or offering to enter into an agreement the making or performance of which by either party constitutes a controlled activity.
- Exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.
An authorised person may not communicate a financial promotion in the United Kingdom in the course of business under section 21 of FSMA unless either:
üControlled activities and investments are prescribed under Schedule 1 of the FPO and include things such as buying bonds or shares, selling insurance and managing investments.
üIts contents are approved for the purposes of section 21 by an authorised person or (2) it is subject to an exemption under the Financial Services & Markets Act 2000 (Financial Promotion) Order 2005 (FPO).
For further details on the process of applying for authorisation please see how do I get authorised?
Money Laundering Regulations 2007 (MLR)
The FCA is also responsible for the registration of firms that conduct activities under Annex 1 of the Banking Coordination Directive (BCD), in addition to firms authorised by the FCA under FSMA. The activities are also listed in The FCA’s new role under the Money Laundering Regulations 2007: Our Approach (PDF).
Further information can be located at: Money Laundering Regulations 2007 (MLR)
Payment Services Regulations 2009 (PSRs)
The Payment Services Directive (PSD) aims to provide a common regulatory approach to the provision of electronic payment services. It came into force in the UK on 1st November 2009 through the PSRs.
For further information please see:
Electronic Money Regulations 2011 (EMRs)
The EMRs, which implements the second Electronic Money Directive (2EMD) in the UK, came into force on 30 April 2011. 2EMD aims to encourage the growth of the electronic money market.