In May 2022, the FCA issued a Policy Statement (PS) called: ‘New cancellation and of variation power: Changes to the Handbook and Enforcement Guide’. In this document, the regulator details the new range of powers that they can issue against a firm without their consent should the FCA believe that they are no longer carrying out business regarding the regulated activities within their issued scope of permissions over a time frame of longer than 12 months. Such powers enable the FCA to cancel their regulatory status without a firm’s consent or vary their permission. This new PS follows the FCA’s “use or lose it” campaign that was shared in September 2021.
Of course, one might argue to root cause of the current state of firms’ bloated permission profiles in the FCA’s bygone generosity in approving permissions without scrutiny; meaning applying firms simply gained permissions “just in case”, only to subsequently find out that, in many cases, they were not necessary for their business model.
The PS sites that the change in policy has been undertaken to protect consumers from the risk of harm. Firms that carry on FCA regulated activities will be able to remain FCA-authorised and have the right to appear on the regulators Financial Services Register. Due to this, accuracy will be of the utmost importance to the FCA. The danger of a lack of accuracy for the FCA’s register would mean that consumers could believe that firms are regulated by the FCA for their products and services, when in fact, they are not. Subsequently, this lack of accuracy there increases a consumer’s risk of being defrauded by criminals.
In addition to the greater need for accuracy, the FCA has outlined concern that if firms do not carry out regulated activities for a prolonged period, they will not be able to maintain an adequate level of relevant experience and knowledge in relation to their systems, processes and staff. This is an important requirement for the FCA when it comes to mandatory controls that are expected by firms carrying out regulated activities. If a firm no longer intends to continue with a regulated activity, they should in theory contact the FCA and apply to have their statutory permissions cancelled. However, many firms fail to do this and due to this lack of cooperation, the FCA was given an additional power from The Financial Services Act 2021 to either cancel or vary the permissions to carry on regulated activities of authorised firms, regardless of their application status.
One may question how the FCA can expect to enforce their new powers without first identifying those firms which they think should be on their list. It seems that it is no small coincidence for firms in the alternative investment space that the advent of the Investment Firm Prudential Regime (IFPR), manifesting in the FCA’s MIFIDPRU Handbook, come with it a swathe of new reporting, much of which pertaining to data points not previously collected by the regulator. In addition to data pertaining to the activity-based capital requirements (known as K-factors), which could feasibly give the FCA a good impression of the sorts of investment activities a firm is undertaking, the most explicit list of questions arises in the annul MIF007 ICARA questionnaires, in which firms are directly asked detailed questions about the sort of firm they are and the activities that are being carried out.
Combining this new data with the fee tariff returns the FCA already has in its data, one can imagine the regulator can build a pretty good picture of which firms are using which permissions. It will be at the FCA’s discretion to carry out this new policy. By consequence, firms should seek to ensure their reporting to, and communications with, the FCA are absolutely accurate to avoid undue scrutiny on their permissions. More broadly firm should also consider whether their permission profile is accurate for the activities they conduct and intend to conduct in the future.
If you are a regulated firm operating under the FCA and would like assistance regarding reporting in relation to the new policy, Wheelhouse Advisors can assist. Contact firstname.lastname@example.org