It is common knowledge, in the industry at least, that FCA authorisation is required for platforms to undertake regulated financial activities in the UK. But what are the criteria for authorisation and what does FCA authorisation actually tell you about a platform?
The Financial Conduct Authority (FCA) is the regulator for more than 56,000 financial services firms and markets in the UK. Its role includes protecting consumers, keeping the industry stable and promoting healthy competition between financial service providers. Although the FCA works with HM Treasury, it operates independently of the UK government.
For an investment platform to be authorised by the FCA in the first instance, it must meet certain standards set by the FCA. This is before they start to operate in the market. One of the FCA’s criteria for platforms is that ‘the management board has adequate knowledge and experience of financial regulation’. This means those operating the platform are capable of making informed decisions regarding their businesses and can be held accountable for their actions; to an investor, it demonstrates not only expertise but a willingness to take responsibility.
Along with having to meet certain expectations, the platform must also satisfy threshold conditions. The FCA reviews the platform’s business plan, which outlines the platforms objectives and strategies, as well as the platform’s resources, risks and budgets; all of this combines to help the FCA form an overall view of the platform.
Once a platform is authorised it will have permission to carry out certain regulated activities.
On an ongoing basis the FCA will ‘review how the firm engages with customers to check that they are treated fairly during their relationship with the firm’.
FCA review of crowdfunding
When the FCA made a call for input to the review of their crowdfunding rules it was discovered that some respondents had concerns regarding the FCA’s current rules. It says in the FCA’s feedback statement to this call for input that ‘four respondents felt the investor assessment process is too light’ and the FCA felt that ‘not all firms satisfied the requirements to conduct an appropriateness test to assess whether investors have the knowledge or experience to understand the risks involved in the investment’.
If this is the case, it can put the investor at a disadvantage since investing generally – and in illiquid, early-stage businesses more specifically – involves a high degree of financial risk. The FCA also expressed ‘concerns about the quality of communications with potential investors, particularly financial promotions’, and were ‘concerned that standards of disclosure do not meet ... expectations’, as also stated in their feedback statement.
The risk inherent in investing in startups cannot be downplayed or hidden beneath superfluous language and flashing lights – this is dismissive of the simple fact that your capital is very much at risk. If platforms aren’t upfront about the terms of the investment and the legal rights attached it could be very misleading for the investor, particularly if that investor has not been confirmed to have relevant investing experience or financial stability.
How platforms get FCA authorisation
In order to secure FCA authorisation, a platform must apply to the FCA and demonstrate that it meets certain expectations, some of which are outlined above; a more detailed breakdown of criteria may be found on the FCA website.
The FCA will then assess if the application is complete and, following the assessment, will review the key aspects of the platform. Any information disclosed by the platform is assessed and checked against any other information held by other regulatory agencies. The business model also receives a full assessment to ensure it complies with the rules in the FCA’s handbook.
The final steps include the review of how the platform engages with its customers and, on some occasions, a meeting with the platform’s representatives. The process for authorisation is very thorough and is intended to determine whether a platform is legitimate, reliable and honest.