Whilst the latest Dear CEO letter to the Payments portfolio has garnered much interest, there are a couple of ‘highlights’ that have largely slipped below the radar. One of these is a reminder that “a UK-authorised PI or EMI must have its head office in the UK. The directors and other senior management who make decisions relating to the firm’s central direction, and the material management decisions of the firm on a day-to-day basis should be based in the UK head office.”
This summarises paragraph 3.51 of the FCA Approach Document, which says:
“The PSRs 2017 and the EMRs do not define what is meant by a firm’s ‘head office’. This is not necessarily the firm’s place of incorporation or the place where its business is wholly or mainly carried on. Although we will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control, that is, the location of:
- the directors and other senior management, who make decisions relating to the firm’s central direction, and the material management decisions of the firm on a day-to-day basis, and
- the central administrative functions of the firm (e.g. central compliance, internal audit)”
This has remained virtually unchanged since I first drafted the text for version 1 of the Approach Document back in 2009. Indeed, this has been a fundamental part of regulatory expectation since the collapse of the Bank of Credit and Commerce International (BCCI) in 1991, with the adoption in European law (remember those days?) of the ‘Post-BCCI Directive’ (or ‘Second Banking Directive/2BCD’). This is also a relevant reference point given that the Payment Services Directives (PSD1/PSD2) and Electronic Money Directive are, effectively, carved out from 2BCD, before being transposed into UK law, where they remain today. The key tenets were that:
- if a financial institution is part of a group, the group structure must be sufficiently transparent to enable the institution itself to be supervised effectively; and
- that financial institutions have their registered office and head office in the same Member State, again such that competent authorities of the ‘home’ Member State (i.e. where the firm is authorised) to supervise them effectively
But what does it all mean, Basil?
Well, it seems as if many authorised firms in the UK may have ‘forgotten’ these principles. In addition, overseas firms looking to establish a presence in the UK may not be fully aware either.
In order to grant ‘permission’ the FCA must be satisfied that the applicant firm satisfies, and can be expected to continue to satisfy, the relevant conditions of authorisation. Some are binary, depending on the activities that a firm wishes to undertake. For example, the amount of regulatory capital a firm is required to hold and maintain is clearly set out and (relatively) easy to understand. Others, such as location of ‘head office’ are more open to interpretation. Key will be to present supporting information in such a way that you can clearly demonstrate to the FCA that the relevant condition is met e.g. that a firm must have its head office in the UK.
The FCA is not (nor can it be) prescriptive as to the composition of the ‘head office’, or local Board of Directors. Rightly, it will assess each firm’s arrangements on a ‘case by case’ basis. However, there are a few high-level principles that we have seen over the years that might be helpful in satisfying the FCA:
- A firm has more Directors resident in the UK than overseas, and veto rights. A firm could have an overseas Director(s) on the board of the UK company if everything else about the company is based in the UK. The CEO, however, should be resident here
- Board meetings must be held in the UK (even if held ‘virtually’ over videoconference, the residency point above will still come into play)
- Operational day to day decisions must be made in the UK
- There must be proper outsourcing agreements, with SLAs etc. in place, even for intra group arrangements
Taking this into account, firms should consider whether the composition/location of their governing body, or the nature of their activity (whether regulated or unregulated) impact the FCA’s ability to effectively supervise the firm. Certainly, if no one is in the UK, there is no one for the FCA to engage with and nothing they can effectively supervise. As with the remote working/outsourcing point on location of offices above, the FCA needs to be able to visit any location where work is performed, business is carried out and employees are based. This includes employees home addresses (if this is where they are working) and would be the case for both supervisory and enforcement visits. Firms should ensure that they make their employees aware of this.
Linked to the ‘capacity’-type points above, a common area of weakness in applications submitted to the FCA is the (lack of) knowledge, skills and experience of key staff within the firm; its non-financial resources. Whilst this makes complete sense if taken to the extreme (e.g. a school leaver wishing to set up a bank) it is often less clear, and more subjective, where such knowledge and experience is less obviously relevant. Here an individual may not have worked in the same type of business before but might nevertheless have transferable skills from previous roles. Key to ensuring that this doesn’t become an issue will be setting out for the FCA as to why you believe these skills to be appropriate. Preferable, of course, would be experience in similar roles at another authorised firm, or perhaps as an agent. We are now seeing that the FCA will not just take the firm’s word for such knowledge and experience, but will look to conduct interviews with candidates to assess the depth – and appropriateness - of that knowledge and experience and how the individual will be willing and able to apply it to the firm’s business model in a regulated business.
If you would like to discuss any aspect of your firm’s governance arrangements, please do not hesitate to get in touch.
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