The Financial Conduct Authority will 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 regulator has given a list of some of the issues firms should consider to prove the strength of their business model to the FCA. These 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.”
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 at the last minute.”