Brokers and other financial services companies often obtain regulatory permission for offering an overwhelming number of products. However, in reality, many ends up offering only a few leading to unused permissions.
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So, why all these unused permissions, and what happens to them？ Many financial service providers do not want to enter certain markets despite having permission to offer those services, while others focus on their core markets with some backup for the future.
The Financial Conduct Authority (FCA ), which oversees UKs financial services sector, is now cracking down on these unused permissions. The regulator bolstered its action against such unused permissions in early 2021 but now has further tightened the regulations.
Last month, the UK supervisor announced that it is speeding up the process of removal of these unutilized permissions: it has significantly shrunk the window. It has the power to cancel a firms Part 4A permission if no regulated activity has been carried out for at least 12 months.
Under the new rules, the FCA will issue two warnings to the company it believes that is not using the regulatory permission. If the company fails to take appropriate action, the regulator will cancel or change the granted permission to only 28 days from the first warning.
The move, according to the regulator, will further strengthen the customer protection measures.
“Businesses with permissions they don‘t need or use, risk misleading consumers,” Mark Steward, the FCA’s Executive Director of Enforcement and Market Oversight, said earlier.
Though it sounds odd, many brokers are gaining permission and are just using them for marketing purposes. They claim to have broader offerings, but only offer a few products.
“As the financial landscape is ever-changing (since the rise of Financial technologies), many firms have needed to pivot and evolve,” said Enigma Strategy's Executive Director, James Lawrence. “I believe this has led to firms submitting new variations of permission (VoP) requests (as we have done with Enigma). However, for this reason, lots of firms have legacy permissions which are now dormant and not being used, thus no longer required.”
The industry is also looking at the FCA's decision in a good way.
“The FCAs decision to expedite the cancellation of unused financial services permissions is a good way of ensuring that Financial Institutions are more transparent,” said Remonda Kirketerp-Møller, the Founder and CEO of Muinmos, a regtech firm.
“It impacts the Financial Institutions capital adequacy, marketing , processes, and procedures across the entire organization, so it is important that Financial Institutions only keep the permissions that are actually needed. This means that they can then focus on ensuring they are compliant for the services and instruments that they actually offer.”
The Initiation
The FCA first introduced the provision of canceling the unused permissions last year with its ‘use it or lose it’ initiative. However, at the time it provided some slack in the conditions of cancellation of unused permissions.
It wanted companies to regularly review regulatory permissions to ensure they are up to date and remove permissions where they are not needed. It even asked the financial service providers to make material changes and apply them to any necessary changes in a timely way.
Though the FCA later asked the companies to voluntarily submit cancellation requests, the regulator pointed out that it has the capacity to withdraw the unused permissions. It tuned out to be a successful move, as, according to FCAs statistics, it carried out 1,090 assessments since May 2021, and 264 firms applied for voluntary cancellation of permissions with another 47 seeking modifications.
“These new powers will enable us to take quicker action to cancel permissions that are not used or needed,” Steward added.
“Firms should regularly review their permissions, ensure they are correct, and they are acting in accordance with them. If they are not needed or used, they should seek to cancel them.”
However, there are some complexities in removing dormant permissions.
As Lawrence pointed out: “If firms' dormant permissions are being removed, firms will essentially have to make a fresh VoP application if they want to pivot back to the offer products they once offered. The possible negative impact this might have on firms who have their permissions removed is that their business plans may stall whilst they submit fresh VoP applications to return the permissions they were once approved for and will need new approvals from the regulator.”
What Was the Necessity？
The FCAs first reminder came just after the confirmation of Brexit. With that, the companies holding the EU license were no longer allowed to offer services in the UK and vice versa. However, certain activities were allowed under special permissions.
“What expedited this for the UK was Brexit as this created major issues under the passporting regime which urgently needed to be addressed. I expect the EU to undergo a similar process soon,” Kirketerp-Møller said.
Though European regulators do not have such direct measures, she believes that The Netherlands, France, and Belgium will introduce similar regulations.
Furthermore, Kirketerp-Møller added: “It will make it more structured and transparent, but it may possibly make some brokers reluctant to apply for a license in the UK unless they need to in order to onboard clients from the UK.”
“All in all, I think it will have a positive effect on the UK financial services sector, which other regulators across the world could learn from to further strengthen their regulatory regime and secure investor protection.”
Lawrence added: “I believe this will give investors further confidence in the UK financial system and ensure firms remain more active and conscious of the permissions and responsibilities they hold. I believe this will ensure more firms are mindful of the SMF and certification regime, which is only a good thing, and will benefit firms and investors alike.”
Brokers gaining new permission only increases the chance of market competition. However, if these permissions are never used, there is no point in that. Also, the unethical marketing tactics used by several brokers are known to all. Considering all these, the FCAs decision will definitely scare some of these brokers, but it will be good for the traders.
