Every day’s a school day: finreg lessons for start-ups

Firms can face challenges in meeting their regulatory obligations in the first few years after authorisation.  In response, the FCA has created a new Early and High Growth Oversight function to help newly-authorised firms adapt to supervision as they start up and grow, with the aim of protecting consumers from bad practice.  The function provides enhanced supervision for firms as they get used to their regulatory status and supports them to understand their obligations so they can meet the standards the FCA expects.

The FCA previously ran a pilot of the initiative during 2021 to 2022 with 32 newly-authorised firms; from this, some themes emerged.  

One common theme was around how well these firms understood the FCA’s rules on financial promotions.  Some examples of poor practice:

• describing products and services as 'FCA approved';
• wrongly claiming on websites 'We worked with the regulator to deliver a product/service';
• advertising services without the proper permissions; and
• advertising attractive-looking investment returns that could not be substantiated.

The FCA makes clear that it does not approve firms' offerings (it authorises firms and gives them permission to offer regulated products and services) nor does it work with firms to develop their offerings.  It also highlights that consumers have much less protection if they sign up for services the firm doesn’t have permission to provide, and that it can take action against them if they do this.

Other common themes emerging from the pilot included:

• Regulatory submissions. Firms must complete and submit regulatory data in a timely way.  Where these are incorrect, firms must make re-submissions, taking up additional time and resource.
• Permissions.  Some firms hold permissions that they do not use, or that they may have applied for incorrectly. Two firms cancelled their permissions following challenge from the FCA. A firm that was part of a wider organisation carrying out regulated activity without authorisation was also closed down.
• Financial projections.  Firms submit business plans as part of the authorisation process. As they start to trade, they may find that their actual revenues do not reasonably track against their projections.
• Business model changes.  Firms often change or adapt their business models in the first years of their life. This can affect the permissions they should hold and the regulatory requirements they must comply with.
• Innovation. When starting out, innovative firms may not have the same resources as more traditional financial services firms to engage with and understand regulation.

Some pointers from the FCA for new firms to bear in mind:

• Before and during the authorisation process, read all the relevant information and guidance provided, for example portfolio letters or guidance relevant to your sector or business.
• Register for access to the FCA’s systems early on. This will ensure you are ready to comply with and submit your regulatory reporting on time. You should also familiarise yourself with your reporting schedule once it’s available.
• You are expected to engage with the regulator openly and transparently, including notifying them if it’s likely that you won’t be able to fulfil your regulatory obligations.

Phase 2 of the pilot has now been launched with 300 newly-authorised firms.  

The FCA intends to use the findings of this next stage to identify other common areas where firms need to raise their standards to meet its rules.