FCA not to produce list of “acceptable jurisdictions” for firms’ authorization
The UK Financial Conduct Authority (FCA) today published its approach to the authorisation and supervision of international firms. The publication aims to explain how the UK regulator will assess international firms when they apply for authorisation to operate in the UK market.
The document, however, reveals some matters which still spark confusion, as indicated in the feedback statement. The FCA’s relation with overseas regulators are at the core of one such perplexing matter.
In the Consultation Paper, the FCA mentioned that when assessing an international firm, it considers the firm’s home jurisdiction to understand its rules and the home state regulator’s supervisory approach, consulting with the regulator where appropriate. The FCA also considers the level of cooperation with the home state regulator.
Some respondents requested that the FCA defers to other regulators as much as possible when it assesses an international firm, and take the supervision by the home state regulator as a substitute for direct supervision by it. The UK regulator notes that, while the home state regulator may look at prudential soundness of the whole firm (and its subsidiaries), those regulators may not supervise a firm’s activities in the UK or as regards its conduct relating to UK consumers. Supervision by the home state regulator cannot normally be a complete substitute for the FCA’s.
Some respondents asked for a list of ‘acceptable’ jurisdictions to be made available, so that firms seeking authorisation can understand their prospect of a successful application and the hurdle they need to clear to meet the FCA’s standards.
The FCA commented:
“We do not plan to produce or publish such a list, given that the focus of our assessment is whether the firm (not the country) meets our expectations to receive or maintain its authorisation”.
However, there are some publicly available country assessments which firms may find helpful to consult while recognising that such assessments will not in themselves be determinative. They include, for example, the assessments produced by the International Monetary Fund under its Financial Sector Assessment Programme, or the assessments produced by European Supervisory Authorities on EU Member States.
The authorisation of a firm applies to the entire firm including its overseas offices. This means for an international firm, the authorisation will apply to the legal entity incorporated outside the UK, including its UK branch and its overseas head office. Firms operating from branches will also often demonstrate a high degree of interconnectedness between their UK and international establishments.
To assess whether the UK operations are appropriately financially resourced by the firm and to avoid the risk that the firm cannot meet any legal and regulatory obligations arising from the UK operations, the FCA will take account of the comparability of relevant home state regulation, wind‐down plans and whether the home state has implemented and complies with relevant global standards. This includes, for example, whether the specific activities that the firm wishes to carry out in the UK from a branch are prudentially regulated in its home state.
Some respondents asked why the FCA sees higher risks of harm from a UK branch as opposed to a subsidiary. They stated that clients may prefer a better capitalised and well-operated overseas entity with a UK branch to a poorly capitalised or operated UK subsidiary.
The FCA notes that the branch-subsidiary consideration is one factor when it assesses firms. Other factors include how well the firm is operated or capitalised.