Financial services law applies to a wide range of businesses. At one end of the spectrum it covers major financial institutions such as banks and stock markets. At the other end of the spectrum it also includes some small businesses which introduce their customers to lenders and insurers.
Working out whether or not your business needs to be authorised under UK financial services law can be a complicated process. Many retailers allow their customers to purchase goods on deferred payment terms. Some of these businesses will need to be authorised, while others will not. Similarly, many firms which assist in the making of financial transactions need to be authorised, but many others do not. Many payments facilitated by businesses fall within the scope of regulated payment services. The determination as to whether or not a particular business is required to be authorised can depend on small details.
Financial Services and Markets Act 2000
The Financial Services and Markets Act 2000 (FSMA) provides that a person must have the correct regulatory status in order to carry out various financial services and activities (Regulated Activities) by way of business in the UK.
A person will have the relevant regulatory status if they are:
- authorised by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA) with permission for the relevant Regulated Activity (Authorised Person); or
- exempt from the need to be authorised (Exempt Person) (see below).
It is a criminal offence to carry out Regulated Activities by way of business in the UK without the necessary regulatory status.
Most Regulated Activities are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). This list of Regulated Activities includes, for example:
- advising on investments;
- arranging deals in investments;
- managing investments; and
- managing an Alternative Investment Fund (AIF) or operating a collective investment scheme (ie a type of investment fund).
Generally speaking, Regulated Activities are carried out in relation to investments which are themselves regulated under FSMA (Regulated Investments). Regulated Investments are also listed in the RAO. This list includes:
- debt instruments;
- certain derivatives;
- contracts of insurance
Regulated Activities are subject to various exclusions. To the extent that an exclusion applies that conduct will not amount to a Regulated Activity.
Some exclusions apply to multiple Regulated Activities (such as those for certain Regulated Activities carried out in the context of a corporate group or joint venture).
Other exclusions only apply to one Regulated Activity. For instance, the Regulated Activity of making arrangements with a view to transactions in investments is subject to an exclusion for persons who are “merely…providing means by which one party to a transaction (or potential transaction) is able to communicate with other such parties”.
Determining whether you are carrying on a Regulated Activity
Generally speaking, there will be two broad questions to consider:
- does your business model fall within the scope of a Regulated Activity and, if so,
- does an exclusion apply?
Sometimes there will be little doubt that a business model falls within the scope of a Regulated Activity. If, for instance, you are setting up a challenger bank then you would need to apply for permission to carry out the Regulated Activity of accepting deposits. Sometimes, however, the situation is less clear. For instance, not all types of advice regarding investments would fall within the Regulated Activity of advising on investments.
There can also be elements of nuance with regard to some exclusions. For instance, taking the “means of communication” exclusion referred to above as an example, careful analysis can sometimes be required to determine whether the person is “merely” providing the means of communication or is adding further value in some relevant way (in which case the exclusion may not apply).
Many businesses design their operations specifically so that they fit within an exclusion.
“By way of business” and “in the UK”
Depending on the circumstances, even if it appears that you would be carrying out a Regulated Activity, it would also be necessary to determine whether or not you would be doing so “by way of business” and/or “in the UK” for the purposes of FSMA.
The FCA has produced guidance on the meaning of “by way of business”. This guidance provides, inter alia, that generally the following factors should be used to determine whether an activity is being carried out “by way of business”:
- the degree of continuity;
- the existence of a commercial element;
- the scale of the activity;
- the proportion which the activity bears to other activities carried on by the same person but which are not regulated; and
- the nature of the particular Regulated Activity that is being considered.
There is also FCA guidance on how to determine whether a Regulated Activity is being carried on in the UK. For instance, in the context of insurance, there is guidance stating that “persons that arrange contracts of insurance will usually be considered as carrying on the activity of arranging in the location where these activities take place” while “in the case of advising, this is generally considered to take place where the advice is received”.
Authorisation and Exemptions
If it seems that you would be carrying on a Regulated Activity by way of business in the UK then, subject to exclusions, you would need to apply for permission to carry on the relevant Regulated Activity.
Alternatively, in the case of some Regulated Activities, it may be possible to become an Exempt Person. The most common type of Exempt Person is a person which is an “appointed representative” for the purposes of Section 39 FSMA (Appointed Representative). In summary, an Appointed Representative is a person which is a party to a contract with an Authorised Person (the Principal) which permits or requires the Appointed Representative to carry out one or more of the Regulated Activities which are listed in the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001. Under the terms of the contract between them, the Principal accepts responsibility for the Appointed Representative’s carrying on of Regulated Activities.
The question of whether or not a business needs to be authorised can be a complicated one. The consequences of carrying out a Regulated Activity by way of business in the UK without authorisation are serious.
However, it is also possible to design business models so that they fit within exclusions or so that they can be carried out under an exemption.
If you would like to discuss how these issues apply to your business, please contact Richard Ellis at firstname.lastname@example.org.