The Financial Conduct Authority will explicitly test advisers’ business models as part of proposed changes to the basic requirements firms have to meet to become and stay authorised.
The FSA has published a consultation paper on how it plans to update the FCA handbook, the new regulator’s rulebook, which sets out changes the Treasury is looking to make to authorisation requirements under the new regulatory structure.
The requirements, known as “threshold conditions”, are the basic criteria all firms must meet to gain authorisation and which they must continue to meet to remain authorised.
The Government has proposed a new business model threshold condition which would require the FCA to assess whether a firm’s business strategy is suitable for its regulated activities.
The Treasury, rather than the FSA, is consulting on the addition of the business model threshold condition. The FSA is consulting on guidance relating to the new requirements.
The regulator has given a list of some of the issues firms should consider to prove the strength of their business model to the FCA, and that it is appropriate to the firm’s regulated activities.
The issues include:
- the assumptions the firm has relied on, the rationale behind the business model, the pricing and product strategy and the needs of and risks to consumers;
- how the firm intends to implement its business model, including areas such as outsourcing arrangements;
- sustainability, for example identifying and mitigating potential risks and contingency plans;
- areas a firm may wish to consider when its business model changes, such as the risks to and the impact of changes on the consumer.
The FSA says the guidance is not specific or exhaustive. It says: “The introduction of the new business model threshold condition demonstrates the importance the FCA will place on a firm’s ability to put forward an appropriate, viable and sustainable business model, reflecting the nature, scale and complexity of the business the firm intends to carry out.”
The regulator says a firm’s business model and any changes made to it, including product strategies, is key to ensuring the business is sustainable and that customers are treated fairly.
It adds: “Although a specific business model threshold does not currently exist, when assessing a firm against the threshold conditions as a whole, the FSA does ask for information about a firm’s business model.
“Therefore the revised threshold conditions, which now include a specific business model threshold condition, make explicit what is already implicit and as a result we believe our new business model guidance reflects existing practice.”
Yellowtail Financial Planning managing director Dennis Hall says: “The FSA should have all this stuff nailed well before RDR comes in. It has done it at an advisory level with certificate of professional standing and now it is concerned about whether businesses are sustainable. It is indicative of the FSA to do it all on the last minute.”