The Financial Conduct Authority’s (FCA’s) latest annual report was released in September. It highlights the FCA’s progress against its statutory objectives, including the new secondary objective to promote international competitiveness and foster economic growth in the UK.
In support of protecting and enhancing the integrity of the financial system, the FCA canceled the authorisation of 1,200 firms in 2023–24 while continuing to raise standards of newly authorised firms. While increased cancellations are definitely a watching brief to see how the FCA continues to adopt this approach, revisiting the FCA’s authorisation approach is worthwhile to see prospects of success for applicants.
The FCA has made it clear in its strategy that it intends to be tougher on firms at the gateway, aiming to prevent them from causing harm and requiring them to meet a higher standard to enter. That said, while the FCA is implementing a more rigorous gateway, it is also becoming more efficient—additional headcount and greater use of technology and digitization are helping it to deliver. The FCA’s annual report sets out that last year saw 98% of applications determined within statutory deadlines, compared to 89% in Q1 2022 and 2023. While the additional scrutiny may not be universally praised, the momentum the FCA is gaining on determining applications more quickly is definitely worth noting.
Our last look at the assertiveness of the FCA gateway highlighted that in the 12 months leading up to October 2022, 27% of new firm applications did not gain authorisation. Given the changes at the gateway, we have requested updated information from the FCA through a Freedom of Information Act (FOIA) request, which highlighted that rejection of applications has continued to increase. Our data showed that across the board, 45% of the 1,500 firms that applied to the FCA for authorisation for the first time between September 2023 and August 2024 were unsuccessful, demonstrating the FCA’s ongoing efforts to increase scrutiny at the gateway.
Figures continued to be driven predominantly by withdrawals (more than 32% of total applications), rather than refusals, with only nine refusals in the 12-month period (or 0.6% of total applications), eight of which related to credit brokering applications. Interestingly, the FCA seems to have expanded the scope of its “rejection” process. For example, if the FCA deems the application poor and contains significant amounts of missing or incorrect information, it will conclude that the submission does not meet the threshold for consideration and will close it down and return the fee. Our last response to an FOIA request highlighted that only about 4% of new authorisations were rejected in the 12 months prior to October 2022. In the 12 months preceding September 2024, 12% of applications were rejected. Rejections usually happen at the very start of the process, demonstrating that the FCA is less willing to waste time on firms who do not put effort into preparing a proper application. This strategy leaves more time for the FCA to focus on firms with more prospects of success.
The data also demonstrated that not all sectors are equal, with some experiencing much higher failure rates for their applications than others. Of the FCA’s 40 portfolios, there were applications from 38 different portfolios in the period. The data showed that some financial services sectors saw no new entrants at all, despite applications being submitted. For example, 100% of motor finance providers’ and retail mortgage lenders’ applications were unsuccessful, and three-quarters of payment services and e-money firms did not make it through.
In traditional wholesale financial markets, firms tend to fare somewhat better, although failure rates are still significant. Wholesale firms have an average failure rate of 30% across all portfolios for new authorisations—this is higher in contract for differences (CFD) providers (50%), corporate finance firms (41%) and alternatives (39%). The data in CFD providers’ and corporate finance firms seems to stack up, given that these models sometimes bring in retail customers, where the FCA is keen to minimize risks. However, in sectors targeting professional and institutional investors, it seems surprising that firms in the alternatives portfolio—mostly alternatives and asset management firms—still struggle to pass through the gateway despite a lower risk model. This may suggest that fund managers seeking to set up on their own, despite significant expertise in the market, are not doing enough to demonstrate that their risk framework and compliance infrastructure is up to the rigorous standards of the FCA.
Based on the data above, it is clear that the FCA authorisation process continues to get tougher, with fewer firms achieving authorisation as the FCA takes further steps to mitigate risk in the industry. Holding on to a license is also becoming more difficult. The FCA’s core thrust of maintaining high standards from the outset is likely to prevent access to bad actors at the gateway, but it is also catching those who do not fully appreciate the complexity of the authorisation process and the regulator’s expectations.
Kroll’s Compliance Consulting practice leverages the experience of both regulatory and ex-industry professionals to ensure that applicants have the right infrastructure in place, communicate their qualifications clearly to the regulator and have the maximum chance of success. If you are considering gaining authorisation from the FCA, please contact our experts.
