Regulatory Hosting Vs Direct Authorisation: Which is the best option for your business?
Many activities undertaken by an investment manager in the UK are regulated activities and are central to a fund manager’s role. Individuals or companies undertaking these regulated activities in the UK must be properly authorised by the Financial Conduct Authority (FCA) or they risk committing a criminal offence.
Start-up fund managers are faced with a choice when it comes to undertaking these regulated activities – either obtaining direct authorisation with the FCA or utilising a regulatory hosting platform. But which option is the right one for your business?
What is Regulatory Hosting?
If you opt for regulatory hosting, you will become an Appointed Representative (AR) of the Host Firm (Principal). The AR can then carry out regulated activities under the FCA, following and adhering to their guidance.
Regulatory hosting enables a business to carry out regulated activities, without being directly FCA-approved. Companies performing regulated activities such as portfolio management, providing investment advice, issuing Financial promotions and Marketing investments, and operating under the hosting umbrella of another approved firm, can offer many advantages.
What are the Advantages of Regulatory Hosting?
One of the main advantages is time saved. By working with a regulatory hosting platform and becoming an AR, firms can be up and running and carrying out regulated activities within weeks, rather than months. By being operational quickly, you can start earning management fees straight away and protect your starting capital. The sooner you can begin posting a track record within an audited fund structure, the more likely you will be able to attract capital. The speed at which you hit the market can be pivotal in achieving long-term success.
Using regulatory hosting can save you money, by entering the market at an affordable rate. Whether it is by paying a monthly fee or giving up a share of profits or equity in the business, it often compares more favourably to the set-up costs for FCA authorisation.
As the host firm already has a license, compliance expertise is on hand. Whether you offer investments, insurance or finance, the host firm can assist with legal advice, business modelling, marketing and more.
Are there any Disadvantages to Regulatory Hosting?
Operating your business under a regulatory host comes with responsibilities, and it means you must comply with the recommendations of that host company. Any implications from your activity can impact the host, meaning you must ensure you stay on the right side of regulation – even if it means not taking risks.
An AR cannot directly manage its own investments, instead, they have to go through the principal. Whilst an AR can market its own products and provide investment advice, it is not permitted to manage any investments.
The principal (or regulatory host) would need to have access to the AR’s staff, policies, procedures and records in order to ensure compliance. Trust is important – as the principal will have copies of all these records. You must be prepared for another firm to have access to all your contacts and business activity.
What is Direct Authorisation?
The alternative to opting for regulatory hosting is Direct Authorisation. If your company is directly authorised, you are directly responsible to the regulator for regulatory compliance, all regulatory compliance, regulatory reporting, fees and advice provided to clients.
What are the Advantages of Direct Authorisation?
One of the more obvious benefits of being Directly Authorised is that you have more control, and the final say on the systems and processes within your business. You can decide the direction you want to go and have the flexibility of whom you deal with and make the decisions on the systems and processes the business uses.
Institutional investors such as credit unions, banks and insurance companies, may prefer direct authorisation over a regulatory hosting umbrella if the umbrella is not well-known or established.
Disadvantages of Direct Authorisation
Whilst the advantages may seem attractive, as with every decision there are two perspectives. Proceeding along the Direct Authorisation route is a huge undertaking and one that requires careful consideration.
The process of obtaining direct authorisation can be time-consuming, taking your attention away from other core aspects of your business. It can take between 6-12 months to gain authorisation, depending on how quickly all the paperwork is submitted and how many questions the FCA raise. Whilst it may seem manageable, it is potentially a year without management fees coming in.
The level of documentation required is extensive, and includes a detailed business plan, balance sheet, financial projection and details of compliance monitoring, a staff organisation chart and details of service providers – this list is not exhaustive, the FCA will require many more documents, and will ask questions regarding submitted documents.
Companies wishing to opt for direct authorisation need to evidence suitability in the way it operates and the way it is managed by those in charge. It is their responsibility to prove to the FCA that it has the appropriate resources, both financial and non-financial. This can impose a considerable significant financial and compliance burden on smaller firms and needs careful consideration.
Helping you to understand your options
Panima understands the challenges and needs faced by clients in today’s financial services environment. As an established regulatory hosting services company, we will use our experiences over the last decade to ensure you can focus on making your business a success allowing you to concentrate on what you do best. Our experts are skilled at providing you with pragmatic and robust advice, specifically tailored to your business needs.
To find out how we can help answer any of your operational, risk management or trading questions, please contact us by email at andrew.myles@panima-capital.com or on 07723 031097.
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