You’ve read that all payday loan companies need to have authorisation from the FCA. But what is an FCA authorisation? Why is it important? Discover more in this article.
This article takes an in-depth look at FCA authorisation. You’ll find all you need to know about:
- What FCA authorisation is
- What the FCA application procedure is: providing documentation; the FCA Threshold Conditions; application fees; using an appointed representative (AR)
- The FCA’s six consumer outcomes to ensure fair treatment
- After receiving FCA authorisation: annual fees; submitting reports; being aware of new regulations; dealing with customer complaints
- Enforcement action by the FCA
- Cancellation of FCA authorisation
- FCA authorisation & the payday loan industry
If you visit any financial or debt advisory website, they’ll emphasise that you should always ensure that any firm or service you use is FCA-authorised by checking their Financial Services Register. However, what does this mean? In this article, we describe what it means when a company is authorised. You’ll learn what the process entails and why it’s necessary. You’ll also discover how firms can lose or choose to cancel their authorisation.
What is the Financial Conduct Authority?
Under the provision of the Financial Services & Markets Act of 2000, all financial service providers, investment firms and consumer credit firms need to receive authorisation by the FCA. Any company which carries out regulated activities – whether it’s a business, not-for-profit or a sole trader – must have the authorisation of the FCA unless it’s exempt. An example of this is the direct lender for bad credit.
Banks, Credit Unions and insurance companies come under the jurisdiction of the FCA as well as the Bank of England’s PRA (Prudential Regulation Authority).
What is the FCA Application Procedure?
Applications for FCA authorisation take 6-12 months. The time frame depends on how long it takes the firm seeking authorisation to gather all the necessary documentation. They find that firms fail to disclose all the paperwork, and as a result, their applications are often delayed. The FCA website has a 9-point checklist of everything an applicant needs to provide. These include business documents, a calculation of projected consumer credit income over the next 12 months, a business plan, a completed IT self-assessment questionnaire and so on.
All this documentation is there to prove that the firm meets the FCA’s Threshold Conditions or minimum requirements to receive authorisation. So, what are these exactly?
FCA Threshold Conditions:
- First of all, the firm should register at Companies House. They should be legally entitled to carry out regulated activities.
- Next, the firm is a ‘body corporate’ under UK law with its ‘mind and management’ (its directors, compliance and auditory functions) located in the UK.
- It must be capable of being effectively supervised by the FCA. This normally means having a UK establishment.
- The firm must have demonstrated it is appropriately resourced.These include financial, management, staff systems and controls.
- It must have demonstrated the competence and ability of management so it can conduct the firm’s affairs with regard for the interests of consumers and the integrity of the UK financial system.
- Lastly, it must have a business model which is suitable for its regulated activities. It must respect the FCA’s operational objectives.
FCA Application Fees
You must include a one-off non-returnable fee with every application for FCA authorisation. The size of the charge depends on whether the firm applying is a consumer credit firm such as short term loans direct lenders a or a firm offering other financial services. For consumer credit firms, the fee also depends on their projected consumer credit income and whether the company requires limited or full permission to carry out their regulated activities.
The FCA receives all it’s funding from the firms which it regulates. To ensure that they distribute this funding fairly among them, there’s a sliding scale according to their business turnover and the complexity of their application itself. However, the following table gives you an idea of the fees:
Moderately complex application
Using an Appointed Representative (AP)
A firm applying for or possessing FCA authorisation (or the principal business) could choose to appoint another person or company to carry out its regulated activities on its behalf. They must have a written contract between this firm and its AP. The AP doesn’t need to apply for FCA authorisation as the principal’s authorisation covers it. This is unless they choose to conduct any regulated activities on their behalf.
The principal firm bears the full responsibility that the AR meets the FCA’s minimum standards (or threshold conditions) at all times. That it complies with the rules and principles relevant to their business and that it sends in the annual FCA regulatory reports and pays the yearly FCA fee.
To ensure that the AR carries out all its duties, the principal firm should have access to its staff, premises and records and carry out regular checks. These checks must make sure the AR is both competent and financially stable.
The AR is also responsible for making sure the principal abides by the six consumer outcomes. The FCA implemented these, so lenders treat customers fairly. These consumer outcomes are one of the keystones of the way the FCA aims to protect potential customers and are the same for Appointed Representatives and directly-authorised firms.
What are the FCA’s 6 Consumer Outcomes?
- Firstly, consumers should be confident that fair treatment of the customer is pivotal to the firm’s corporate culture.
- Next, the design of financial products and services that companies market and sell should meet the needs of the consumer groups.
- Consumers should receive clear information. They should be appropriately informed before, during and after the point of sale.
- The advice given to potential customers should be suitable and take account of their circumstances.
- Lenders must provide consumers with products which perform in the way that firms have led them to expect and associated services should be of an acceptable standard.
- Lastly, consumers shouldn’t face unreasonable post-sale barriers to change the product, switch provider, submit a claim and make a complaint.
The FCA also emphasise the importance of authorised firms using customer feedback to improve their services. They encourage taking notice of any complaints that customers might have raised to make any necessary changes.
After Receiving FCA Authorisation
Once a firm has received FCA authorisation, it doesn’t mean that they have no further contact with the FCA and can carry on business as usual. There are some obligations which it has to bear in mind.
Every FCA-authorised firm must pay a fee every year to the FCA to fund its regulatory work. The size of the fee depends on the size/nature of the firm. The FCA contacts them to notify them of how much they have to pay.
Every firm (or the AR on their behalf) must submit reports to the FCA. Some of the reports are compulsory for all firms. Some depend on the financial product or service provided. These reports include their annual accounts, market data and product sales reports, etc.
Being Aware of New Regulations
Financial products, services and markets aren’t static. As a result, the FCA is continually researching consultation papers and changing the regulations to reflect this evolving market. You only have to see the enormous changes in the cheap online payday loans over the last four years to understand this. Once a firm receives FCA authorisation, it’s their responsibility to keep abreast of any regulatory changes in their sector and put them into effect.
Dealing with Complaints
The Financial Ombudsman Service of the FCA provides a mediation service. They use it when customers have complaints which, in their opinion, aren’t dealt with satisfactorily by their financial service provider.;
One of the roles of the FCA is to police FCA authorised firms. There are real consequences for those who don’t follow the rules. Their enforcement powers are far-reaching including criminal, civil and regulatory action.
Punishments for firms which don’t abide by the rules include having their authorisation withdrawn. Alternatively, they can be prohibited or suspended from carrying out regulated activities; being fined; having warnings issued about them and even criminal prosecutions.
Let’s take the example of having authorisation taken away, how many firms does this affect?
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Cancellations of FCA Authorisation
In the 12-month period up to June 2017, the FCA’s Threshold Conditions Team (TCT) took away the authorisations of 207 firms. Many of them had their FCA authorisation cancelled for relatively simple failings. This was due to not paying their annual fees on time or their failure to submit their reports to the FCA.
In addition, in the same period, the TCT accepted 1,387 referrals of firms which failed to satisfy the minimum regulatory standards. Of these, 824 retained their authorisation by submitting outstanding returns and paying their overdue fees while 122 companies chose to cancel their authorisation. The TCT recommended taking the authorisation away from these 207 firms for repeatedly being referred to Enforcement for failing to comply with the necessary regulatory requirements.
FCA Authorisation & the Payday Loan Industry
We saw something very similar when the FCA took over the regulation of payday loan companies from the Office of Fair Trading in April 2014. As much as an estimated 38% of payday lenders left the market. Of those, 188 firms had initially applied for authorisation and had an interim licence to operate. However, they later withdrew their applications when it became apparent that they wouldn’t receive authorisation as they didn’t meet the required regulatory standards. By 2016, 144 firms held the authorisation to give payday loans, yet only 30 companies were actively lending in December 2016.
With the rigorous application procedure for FCA authorisation and the continual supervision of financial firms, they intend to protect both the consumer and UK’s financial markets from abuse. Furthermore, seeing how it works in practice illustrates more clearly how important it is to ensure that any firms you do business with have FCA authorisation, an online loan for bad credit company or other.