FCA consults on regulation of international firms

Maria Nikolova

The regulator will conduct an overall assessment of an international firm against a set of relevant minimum standards, such as the firm’s ability to mitigate the risk of client assets harm.

The UK Financial Conduct Authority (FCA) has launched a consultation on its approach to the authorisation and supervision of international firms operating in the UK.

This is relevant to EEA firms that intend to seek authorisation in the UK in the future, including those entering the Temporary Permissions Regime, as well as firms from non-EEA countries that have applied or intend to apply for authorisation in the UK, or are already authorised in the UK. The FCA expects that there will be an increase in the number of international firms seeking authorisation at the end of the Brexit transition period, with over 1,500 firms currently registered in the Temporary Permissions Regime.

International firms serving UK customers through branches can sometimes create different risks of harm compared to UK firms because of the way their businesses are structured and operate. As part of this consultation, the FCA wants to hear views on how these risks can be mitigated, and when it would be appropriate for an international firm to seek authorisation as a UK-incorporated firm for all or part of its business.

Firms that wish to be authorised in the UK need to meet the minimum standards set out in the relevant legislation. Once authorised, firms need to meet the minimum standards at all times.

As part of the overall assessment of an international firm, the FCA considers the international firm’s potential to cause harm and the level of these risks. There are three potential risks that are more relevant for international firms, especially those operating from branches:

  • Protection for the UK office’s retail customers, through redress and supervisory oversight for example, could be less effective, especially if the international firm becomes insolvent or exits the UK (‘retail harm’).
  • The UK rules that protect client money or custody assets safeguarded through the UK office and the home state insolvency regime which become applicable if the international firm fails may not be aligned. This misalignment could negatively impact the outcome for UK clients (‘client assets harm’).
  • Shocks or risks that originate from the international firm’s overseas offices could, in some circumstances, be more difficult to detect or prevent and could be passed easily to its UK office, affecting the stability and integrity of the UK markets in which it operates or to which it is connected (‘wholesale harm’).

International firms planning to serve retail customers will need to demonstrate that they adequately mitigate the risk of retail harm. This may be more difficult for firms whose business and operational models show a higher propensity for causing harms to consumers.

International firms planning to safeguard client assets will need to demonstrate that they adequately mitigate the risk of client assets harm. The likelihood of this risk and mitigation measures depend on how home state laws treat client assets safeguarded under UK rules.

International firms planning to provide wholesale financial services will need to demonstrate that they adequately mitigate the risk of wholesale harm.

If having conducted the assessment, the FCA concludes that an international firm meets the minimum standards, it will authorise the firm.

The regulator may consider imposing limitations or requirements as part of any approval, for it to be satisfied that the firm will meet minimum standards on an ongoing basis.

  • A limitation is placed on a firm’s permission to restrict its activities to reduce the potential for harm. For example, the FCA might limit the number or category of customers a firm can deal with, or the number of specified investments that a firm can deal in.
  • A requirement is placed on a firm to require it to take or refrain from taking certain action. For example, the FCA might require a firm not to take on new business, or not to trade in certain specified investments.

If the FCA considers that the minimum standards are not met, the regulator may refuse to permit the firm to conduct the relevant regulated activities. Where the risk of harm cannot be adequately mitigated for an international firm applying to operate in the UK from a branch, but could be mitigated if that firm undertakes the relevant activity through a UK entity, the FCA may invite the firm to apply for authorisation on that basis to undertake the activity in the UK.

Comments on this consultation paper are accepted by November 27, 2020.

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