An introduction to the FCA's Early and High Growth Oversight Framework

Early and High Growth Oversight (“Early Oversight”) is a relatively new FCA initiative which has created an enhanced supervisory framework for newly authorised firms. As they get used to their regulatory status, the FCA wants these firms to have a better understanding of their standards and expectations so that processes can be embedded at an early stage of the growth cycle. Early Oversight helps the FCA quickly identify and address potential harms that can develop in newly authorised firms.

The FCA also believes that supporting small and innovative firms helps promote competition in the financial sector by lowering the regulatory barriers to entry. The aim is to give firms direct and immediate access to them so that they can better anticipate risks and act on them.

What are the implications for newly authorised firms?

Prior to the Early Oversight initiative, newly authorised firms could generally pat themselves on the back for getting over the line. They would then expect little interaction with the regulator provided they got their baseline submissions obligations on track. This is no longer the case.

To successfully negotiate a FCA authorisation application a firm will have had to prove that they can satisfy the so-called Threshold Conditions and they are “ready, willing and organised” to comply on an ongoing basis. Whilst this has always been the case in theory, Early Oversight effectively carries this scrutiny forward (typically for a year but this may be extended).

How likely is it that my firm will be selected for Early Oversight supervision?

When the pilot Early Oversight scheme was concluded, the FCA committed to selecting some 300 firms for Early Oversight during 2022 and 2023. Although the FCA have since been reticent about numbers, we believe the intention is eventually for all newly authorised firms to be subject to Early Oversight. In the short term, we anticipate some prioritisation of higher risk firms, such as those dealing with retail clients and/or with permission to hold client money.

What should I expect if my firm is selected?

You will be invited to an introductory call with the Early Oversight team member who has been assigned to your firm. This will be followed by at least one detailed data request/questionnaire that must be completed within a set time. The process thereafter will be to a considerable extent dependent on your responses but may also be followed by further data gathering on specific topics.

What is Early Oversight likely to focus on?

The FCA have provided guidance on their Early Oversight webpage highlighting some of the common themes or problem areas that they see in newly authorised firms. These are a good place to start when thinking about areas the FCA might want to scrutinise.

• Business model: Firms will recall the Regulatory Business Plan that is a key document in the authorisation application process. This summarises the firm’s business strategy, its governance processes and the systems and controls being put in place to ensure compliance with FCA regulations. Whilst the FCA understands that a firm’s strategy will evolve over time, it will want to understand why changes have been made and whether the revised strategy is still viable.
• Regulatory permissions: in the light of any changes to the business plan, is the permissions profile of the firm still correct? The FCA do not like firms not using their permissions, particularly if there is a concern that their regulated status is being used as a marketing ploy. If regulated activity has not yet commenced, this will need to be explained and a credible timetable re-presented.
• Regulatory submissions: are RegData returns being submitted on time and in accordance with FCA guidance. Other submissions often overlooked include the required annual attestations on firm and FCA Directory details.
• Financial projections: again, the FCA understand that financial projections submitted during the application process will change in the real world. However, significant variances will need to be acknowledged and accounted for, particularly where these may impact on your regulatory capital and liquidity requirements.
• Financial promotions and marketing: start-ups naturally want to promote themselves in the best possible light in order to win and establish new business. Firms need to be aware of who they are allowed to promote to (depending on their permissions profile and the nature of their products and services). Certain types of products (e.g. unregulated collective investment schemes) may need to be registered before marketing can begin.

How else can I prepare for Early Oversight?

Before authorisation is completed, the FCA recommends that firms familiarise themselves with the now regular “Dear CEO” portfolio letters that highlight FCA concerns in individual industry sectors (we can guide you on which is relevant to your firm). When authorised, early registration with FCA systems (RegData, Connect and Online Invoicing) is recommended plus familiarising yourself with your reporting schedule.

Beyond that, the FCA expect a broad familiarity with their rules and principles and require that firms are fully transparent with them about breaches or any future obligations that may not be met. Combatting financial crime is always one of the FCA’s highest priorities and you should almost certainly expect scrutiny of your controls and processes in this area.

What are the consequences of getting it wrong?

In the worst-case scenario, the FCA can cancel your authorisation (or strongly recommend that you do so before they take enforcement action). Although relatively uncommon, this is likely to happen if you fail to commence regulated activity over a protracted period or commit a significant breach of your regulatory obligations which reveal major weaknesses in your systems and controls. Against that, a firm showing good progress towards establishing a strong culture of compliance will likely be viewed favourably by Early Oversight, even if there are one or two blips along the way.

How can Cosegic help?

Our objective as compliance consultants is to see that you have the appropriate systems, controls and documentation in place (i.e. appropriate to your business model) to satisfy the requirements and expectations of regulators, clients and investors alike. Besides getting you as a newly authorised firm to that standard, we have extensive experience of firms’ interactions with the FCA, including Early Oversight supervision. We will help draft your responses to FCA, prepare you for any face-to-face interviews, and implement any enhancements to your compliance programme as may be suggested by the regulator’s observations.