What went wrong at the FCA: A retrospective of authorisations in 2021

  • Posted on: 10 January 2022
  • Written by: James Borley

The past 18 months have seen a number of changes at the FCA, some might argue it has been their (prolonged) annus horribilis and although this article asks what went wrong, many at the FCA might be scratching their head as to what went right in 2021. Many of these changes, in isolation, are noteworthy, but in combination might serve to explain the frustrations felt by applicant firms waiting at the gateway, both waiting to be allocated a case officer and to obtain authorisation. Let’s look back at some of these changes with a purpose to try and look for answers to the current delays that we are seeing, followed by a little look forward to what we can expect for authorisations in 2022. Though, based on our current experiences, the picture that is being painted is looking a little bleak for new firm authorisations in 2022.

1. Changes at the top, middle and bottom…

Nikhil Rathi was appointed as the FCA’s new CEO from 1 October 2020. Not a regulator per se, Rathi arrived at the FCA from the London Stock Exchange, having attracted overseas investment to the UK, but with experience of working at HM Treasury financial stability unit. With a stated admiration of payments fintechs, one might have expected Rathi’s FCA to be welcoming of such applications for authorisation, however whilst the FCA maintains it is welcoming, the reality for some firms might be somewhat different, more of which in Section 3.

With a new CEO came further wholesale changes at ExCo level, with the departures of stalwart directors Nausicaa Delfas (International and COO), Jonathan Davidson (Retail Supervision and Authorisations), and Chris Woolard (Strategy & Competition and interim CEO); to be followed by Megan Butler (ironically the Executive Director for Transformation) next spring. We also saw the FCA chair, Charles Randell, resign in October, again departing in the spring of 2022, some 12 months early.

As above, so below

In addition to the top-level departures, the FCA has seen the departure of approximately 100 staff, comprised of directors, managers and technical specialists. With so many departures, no one thing can be attributed to this spate of resignations, although the FCA’s “Mutually Agreed Resignation Scheme” (references of which can be found in this link) is surely a factor, but not limited to Authorisations. There are however a lot of ‘career regulators’ at the FCA (I used to be one myself) sitting in posts for long periods, for whom Rathi’s new vision for the FCA might well be an uncomfortable change to what they have become accustomed to. Their departure will also allow young talent to progress and obtain manager positions.

What’s left behind

Over the last six months or so there have been further reports of serious disaffection at ground level, partly at the pace and direction of Rathi’s Transformation programme but also (and probably more relevantly) at Rathi’s proposals with regards to salaries and bonuses. With reported talk of unionisation to challenge Rathi’s proposals, this spate of departures across all of the FCA does not suggest a happy ship.

2. Under Scrutiny...

Gloster Report

Shortly after Rathi’s appointment (a ‘welcome to the FCA’ if you will) he was the (un)grateful recipient of Dame Elizabeth Gloster’s report into the FCA’s regulation of London Capital & Finance ('LCF') published on 23 Nov 2020. The report highlighted a disconnect between senior management and ground-level staff, which meant that the FCA failed to identify and act on risk warnings regarding failings at LCF which, in many respects, went beyond what the FCA believed to be in its regulatory purview.

Parker Report

Hot on the heels of Gloster, came the Parker Report in December 2020, an independent review conducted by Raj Parker of the Financial Services Authority’s/FCA’s regulation of the Connaught Income Fund Series 1 (an unregulated collective investment scheme providing short-term bridging finance to commercial operators in the UK property market). Whilst recognising that “the Regulator today is not the same as it was when it handled the issues I have reported on” and that evident change was in progress and further changes afoot, the review highlighted a number of key lessons which have been addressed in the FCA’s progress report, which is discussed in Section 3 of this article.

3. Leading to all change...?

Transformation Programme / Business Plan

In the FCA’s Business Plan for 2021/2022, Rathi announced plans for the FCA’s ‘transformation’ in recognition of the findings of both Gloster and Parker reports. Intertwined and indistinguishable perhaps, but certainly the language used was more in terms of wishing to build a more assertive FCA and a more robust gateway, stating “we will expect [refusal/withdrawal/rejection rates] to increase initially as we make the gateway more robust” about which we commented at the time. 

And so, it came to pass that the FCA got on with applying its more assertive approach at the gateway. Indeed, in its latest update report into how it has addressed the recommendations and lessons from Gloster and Parker, the FCA states “We are applying our standards more robustly at the gateway. In the year to 2 December 2021, 1 in 5 firms (up from 1 in 6 when we last reported), which applied to us for authorisation were refused, rejected or withdrew their application after discussions with our Authorisations Division. We base this approach on the risk profile of the firm’s business model, as illustrated by the strong actions we are taking with registration or authorisation of firms such as crypto asset exchanges and firms that market retail contracts for difference”. Not a word about the length of time it takes for the Authorisations Division to actually start its assessment of an application though…

Decision-making changes

But that’s not all. You will recall the FCA’s decision to remove the Regulatory Decisions Committee (RDC) from considering firms’ representations against Warning Notices and inserting instead an internal senior committee, effectively becoming 'judge, jury and executioner' (click to read our article on the topic). Whilst there may indeed be logic to support the FCA’s argument that this makes for a more efficient process, the fear is that it will encourage junior staff, already empowered to make bold decisions, to push back on applications that might not, at first blush, quite meet the requisite standards.

Put’em all together and what have you got?

So, a perfect storm of low risk tolerance, staff shortages, staff disaffection and fear, which has led to increasing delays in case officer allocation and firm frustrations. As I’ve written before, we are seeing an increased prevalence of case officers pushing back on applications for authorisation when they do commence their assessment and, in our view, with little appetite to allow firms to address perceived (by the FCA) issues.

Indeed, whilst the FCA expects firms to demonstrate they are ‘ready willing and organised’ its current timings before a case officer even looks at an application do not make such an approach ‘fair’. The timings for determining an application embedded in legislation – 3/6 months for a complete application, 12 months for an incomplete application – would suggest that a fair amount of ‘back and forth’ is expected, but very little is now forthcoming.

As they say, we are where we are. As consultants, we like to think that we can add value to a firm’s application, by anticipating what the FCA expects to see. Increasingly though, the FCA is taking almost a zero-tolerance approach to applications, with any little omission creating grounds for refusal. It will certainly be the case, though, that our extensive experience in supporting application projects, combined with our unique insights into the authorisation process, should make the whole process less painful than going it alone. In my next article, I’ll be looking at the Authorisations process, and threshold conditions, in more detail – what the FCA is really looking for, and how you can demonstrate it.