FCA consults on approach to authorising international firms

The FCA has published a consultation paper (CP20/20) describing its approach to the authorisation of international firms.  In the context of Brexit, the FCA's comments will be relevant to firms (including insurers and insurance intermediaries) who have established EEA hubs to mitigate the loss of passporting rights, while continuing to conduct some of their activities through a UK branch.  In most cases at least, these firms will maintain their authorisation in the UK from the end of the Brexit implementation period by entering the Temporary Permissions Regime.  After that, they will require full authorisation in the UK which will bring the FCA's guidance into play.

Key points for firms include:

• UK presence: The FCA expects firms to have an establishment or physical presence in the UK (i.e. a UK "branch").  This will, of course, be a relevant consideration for EEA firms that currently operate on a services-only basis in the UK but whose activities in the UK nonetheless will require authorisation once passporting rights fall away.  The need for a UK branch is, of course, consistent with the practice adopted by the PRA to international insurers.
• Branch vs subsidiary: The FCA will be looking to see how firms mitigate heightened risks that come with conducting business through a UK branch, as compared with establishing a UK-incorporated subsidiary. We can expect the FCA to put pressure on an international firm to convert its branch to a subsidiary where it believes that operating through the branch poses an unacceptable level of risk.  Again, of course, this would be consistent with the approach that has already been taken by the PRA to insurers.
• Cross-border services:  In assessing the risks of harm, the FCA will look at both (a) risks associated with activities being undertaken through a branch, for example, because it is more difficult for the FCA to take action or because of overlapping regulatory regimes in the home state and the UK; and (b) the nature and scale of activities the international firm intends to conduct from outside the UK which may raise different concerns e.g. FSCS cover may not be available.
• Risks of harm: Three broad categories of harm identified in the paper are retail harm, client asset harm and wholesale harm, although the FCA will also consider sector and business specific risks as part of its assessment. The FCA will also consider home state regulation and supervision, together with international co-operation.
• Limitations and requirements: The FCA may impose limitations or requirements as part of any approval given to an international firm if it believes it necessary to ensure that the firm will meet conditions for authorisation on an ongoing basis.  For example, it may limit the number or category of customers a firm can deal with.

Our longer briefing on CP20/20 can be found here.

The consultation will be of particular interest to insurance intermediaries that are only regulated by the FCA in the UK.  For insurers, the FCA's comments supplement PRA guidance already issued on this topic (see SS44/15 and SS2/18).  The deadline for commenting on CP20/20 is 27 November 2020.