On 9 September 2021, the UK Financial Conduct Authority (FCA) published Consultation Paper 21/28 “New cancellation and variation power: Changes to the Handbook and Enforcement Guide” (the Consultation). This relates to powers granted to the FCA under the Financial Services Act 2021 (the New Powers).
What are the New Powers?
The FCA has since its creation had powers to cancel or vary an authorised firm’s regulatory permissions in certain circumstances, including where the firm has not utilised a permission for a period of 12 months or more. The New Powers allow the FCA to more quickly vary or cancel a firm’s permissions where they are not being utilised. In particular, the FCA no longer has to wait for 12 months of non-usage of a permission. The FCA is consulting on changes to its Handbook and its Enforcement Guide to reflect the New Powers.
Before the FCA uses the New Powers, it must provide a notice to the relevant firm warning it of the risk of variation or cancellation of the permission(s). If the firm does not respond as the FCA directs, the FCA must give a second warning notice. In the second notice, the FCA must also specify the proposed date of the cancellation or variation, the proposed extent of any variation, and the steps it directs the firm can take to avoid the outcome. A firm may be able to avoid cancellation or variation by responding as directed. However, it has no general right to challenge the notices. Further, the FCA does not have to provide the firm with any specific evidence before cancelling or varying its permissions. In other words, the burden is on the relevant firm to demonstrate that the permission(s) should not be cancelled or varied.
To which firms do the New Powers apply?
The New Powers apply to firms authorised by the FCA under Part 4A of the Financial Services and Markets Act 2000 (FSMA) (or deemed to be authorised as such under the relevant Brexit temporary permissions or supervised run-off regimes). This includes most non-bank UK investment advisers and managers as well as consumer credit firms and insurance intermediaries.
The New Powers do not apply to firms authorised by the UK Prudential Regulation Authority, such as UK banks, or to FCA-authorised payment institutions or electronic money institutions (except payment institutions and electronic money institutions that are also authorised by the FCA under Part 4A of FSMA). However, the New Powers reflect a broader shift in supervisory approach by the FCA toward greater scrutiny of firms’ business plans and regulatory permissions. In particular, the Consultation demonstrates that the FCA continues to be concerned that many firms do not have the appropriate regulatory permissions for their businesses. This has significance for all UK-authorised firms.
Key takeaways for firms
Firms should review on an ongoing basis whether their existing regulatory permissions are appropriate for their business models and service offerings. In particular, firms should take into account any plans for expansion or new services, which may require new permissions or the use of permissions that are held but not yet used.
In our experience, firms across the financial services sector have often applied for and obtained a broad range of regulatory permissions as part of their applications for authorisation by the FCA, including permissions for activities that the firm might not initially intend to carry on. This has helped some firms to “future-proof” their businesses, so that additional permissions are less likely to be needed when existing service offerings are expanded or new ones launched. Until recently, the FCA did not typically take a hard line against such firms for using this over-inclusive approach. However, given the FCA’s emerging focus on ensuring that firms have only the permissions they are actually using, firms will need to consider more carefully whether they are able to justify applying for permissions that might not be immediately required to operate their businesses.
As a practical matter, firms should consider whether they are using their existing regulatory permissions and include reviews of these in their change processes; for example, for new product launches, changes to business models and expansions of service offerings to new categories of clients. Firms should factor any required variations of permissions into timelines for the changes and have a clear strategy in place for communicating with the FCA.
Firms should also review their obligations to third parties and customers. For example, if a firm has represented to a customer or supplier that it is providing particular regulated services, or given contractual undertakings in relation to its regulatory permissions, it may need to engage with the customer or supplier if it is required to make changes.
Finally, as the FCA has relatively broad powers to publish notices it serves against firms, firms should consider the reputational risk that may arise as a consequence of the FCA making public a unilateral cancellation or variation of the firm’s permissions. This is another reason for firms to be vigilant and proactive in this area.
The FCA has requested responses to the Consultation by 29 October 2021. Firms should consider the effect that these proposals may have on their businesses and whether to respond to the Consultation, either individually or through a relevant trade association.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
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