What are the ongoing requirements for an authorised firm?

The Threshold Conditions require ongoing compliance. Other applicable FCA rules differ depending on the nature of the business being undertaken and the following is a high level summary of some of the key requirements:

General Principles: the principles are a general statement of the fundamental obligations of firms under the UK regulatory system. These underpin all the more detailed rules in the FCA Handbook and the FCA has the power to fine firms for failing to adhere to the General Principles

Marketing: there are detailed rules applicable in the UK and elsewhere in the EU to marketing offshore unregulated collective investment schemes. Broadly, in the UK, unless certain criteria can be satisfied regarding the expertise and experience of any individual, marketing is broadly limited to those institutional investors who can be classified as “professional clients” or “eligible counterparties” within the FCA’s client classification requirements. The majority of managers of offshore unregulated funds will not have permission to conduct investment activities with retail clients. For AIFMs, AIFMD also imposes prescriptive disclosure and reporting requirements in relation to AIF marketing activities

Dealing and managing: for those firms undertaking dealing or portfolio management activities there are extensive provisions designed to ensure the clients of the firm are treated fairly. There is no relaxation even where the firm’s sole customer is an offshore fund established by it. Provisions for example cover:

Best execution – a duty to achieve the best possible result for the client when executing trades
Soft (dealing) commissions – there are detailed rules restricting the use of soft commission credits to pay for certain manager expenses, and
Client order handling – to ensure fair allocation of orders PA Dealing.

For an AIFM, many of the conduct requirements apply directly to AIFMs under the AIFMD European regime.

Systems and controls: the FCA rules require a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. For both MiFID firms and AIFMs, there are detailed provisions underpinning this overall principle

Monitoring and reporting: the FCA rules require a firm to undertake ongoing monitoring of compliance with the FCA rules. They further require a mix of quarterly, six monthly and annual reports on various items. For AIFMs, further information and reporting requirements apply, which will be either on a quarterly or half-yearly basis depending on whether assets under management (as calculated under AIFMD) exceed EUR 1 billion. The requirements are set out in the FCA Handbook and in AIFMD

Regulatory capital: a firm is required to maintain, on an ongoing basis, the required level of capital (as described above). MiFID firms and AIFMs with “top up” permissions are also required to carry out a risk assessment on an annual basis called an ICAAP (Individual Capital Adequacy Assessment Process) An ICAAP is the process by which a firm’s senior management consider their business risks. It requires the documentation of the key risks, details of the management of those risks and consideration of any capital that might need to be set aside to adequately mitigate those risks. Where a firm identifies additional capital needs through its ICAAP, this additional capital should be held, and becomes the firm’s new minimum capital requirement

Liquidity: MiFID firms and AIFMs with “top up” permissions are also required to maintain liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that their liabilities cannot be met as they fall due. Its strategy and systems for managing liquidity risk are required to be reviewed annually

Transaction reporting: firms are required to report to the FCA all transactions in specified financial instruments which are traded on an EU regulated market, whether or not the transaction concerned actually takes place on an EU regulated market, as well as OTC trades in derivatives whose underlying is a debt- or equity-related financial instrument traded on an EU regulated market. The firm can agree that such reports will be made on its behalf by a third party, such as the relevant counterparty. For trades taking place on an EU regulated market, certain markets will undertake to report the transaction on the firm’s behalf

AIFMD-specific requirements: Under the AIFMD regime, there are additional organisational, structuring and conduct requirements specific to AIFMs. These include, in overview, requirements to ensure that the fund appoints a depositary, certain additional policy requirements (e.g. around portfolio liquidity, portfolio risk management, valuation), restrictions on delegation, transparency and restrictions on the use of leverage in the portfolio and new rules on remuneration. More detail on these AIFMD specific requirements can be found in our AIFMD Toolkit.

This note serves as an introduction to the UK authorisation regime and is not exhaustive. We are happy to advise further on any of the issues highlighted above.