CMCs – How Will the FCA Assess Authorisation Applications?

The FCA assesses authorisation applications against their minimum requirements known as the threshold conditions. The FCA’s threshold conditions provide applicant firms with certainty about the criteria upon which the FCA authorisation team assesses applications and dispels the notion that ‘the FCA are out to get certain firms.’

Claims Management Compliance want to equip CMCs with an understanding of how the FCA apply the threshold conditions in practice to give CMCs greater certainty and confidence in their preparations for the transfer to the FCA.

Threshold Conditions

There are five threshold conditions which the FCA uses to assess authorisation applications.

  1. Location of offices

The location of offices threshold condition requires all authorisation candidate firms to, at least, have its ‘mind and management’ located in the UK. In practice, most CMCs should be able to satisfy this requirement as the majority of CMCs operate from the UK.

CMCs that are currently classed as ‘Overseas’ on the CMRU’s authorised business register would need to make arrangements to have, at least, its compliance function based in the UK for the purposes of meeting the location of offices threshold condition.

  1. Effective supervision

The effective supervision threshold condition is concerned with whether the CMCs’ arrangements enable the FCA to effectively supervise its compliance with the requirements of the regulatory system. The effective supervision threshold condition links to the location of offices threshold condition in that having a ‘mind and management’ presence in the UK enables the FCA to effectively supervise firms.

The effective supervision threshold condition relates to (1) the corporate structure of a CMC and whether this would prohibit the FCA’s ability to effectively supervise the CMC and (2) the CMC’s ability to maintain adequate records to demonstrate the compliant operation of its regulated claims management activities.

Corporate structure

The corporate structure element of this threshold condition is concerned with complex group structures which can have parent undertakings domiciled in overseas jurisdictions that could affect the FCA’s ability to obtain information to effectively supervise compliance with the regulatory system. This should not be a problem for most CMCs as most CMCs who are in a group corporate structure are in a group structure that consists of UK incorporated legal entities.

Record keeping

The record keeping element of this threshold condition is concerned with CMCs’ systems to facilitate effective record keeping. This links to the proposed Claims Management Conduct of Business sourcebook which requires CMCs to have call recording facilities, arrangements to retain electronic communications and arrangements to maintain data due diligence records. The general principle behind the record keeping element of this threshold condition is that CMCs would need to demonstrate to the FCA that they have the ability to keep an adequate audit trail of all their regulated claims management business to enable the FCA to effectively supervise compliance with the requirements of the regulatory system.

  1. Appropriate resources

The appropriate resources consist of two elements, namely (1) appropriate financial resources and (2) appropriate non-financial resources. The appropriate financial resources requirement requires CMCs to demonstrate to the FCA that they are solvent. For CMCs that contract with consumers and make representations of their behalf the FCA will require you to demonstrate that you have sufficient capital to meet the minimum capital resources requirement that applies to you. The capital resources requirements are as follows:

Regulated Turnover Without Client Account With Client Account
Over £1 million £10,000 or two month’s fixed expenditure (if higher) (plus £20,000) e.g. £30,000
Under £1 million £5,000 or two month’s fixed expenditure (if higher) (plus £20,000) e.g. £25,000

 

CMCs that do not contract with consumers (i.e. lead generators) will not be subject to a capital resources requirement but will simply have to demonstrate to the FCA that they are solvent.

CMCs would be required to demonstrate solvency and satisfaction of the capital resources requirement by submitting their opening and forecasted closing balance sheet as part of the FCA authorisation process.

In addition to the above, personal injury CMCs that make representations on behalf of consumers (i.e. PI CMCs who will apply for the permission of advice, investigation or representation of a personal injury claim) will be required to hold professional indemnity insurance that meets the FCA’s minimum requirements. These are as follows:

  • Minimum level of indemnity (single claim): £250,000;
  • Minimum level of indemnity (aggregate claim): £500,000;
  • Excess: no more than £10,000 per claim;
  • The policy should provide cover for legal defence costs; and
  • The policy should be underwritten on a claims made and reported basis (this means both that the claim must be made against the CMC and the CMC must report it to the insurer during the period covered by the policy).

PI CMCs who will be subject to this requirement should make arrangements to revise their PII cover in due course as they will be required to provide a copy of their PII policy as part of the FCA authorisation process to demonstrate satisfaction of this rule.

The non-financial resources element of this threshold condition is concerned with the quality, quantity and availability of CMCs’ human resources, IT systems and compliance resources (i.e. systems and controls). Beyond the jargon, systems and controls requires CMCs to demonstrate to the FCA that they have the following arrangements in place to adequately identify, control and monitor risk (particularly consumer risk) and systems to operate the business with diligence, namely:

  • A sound organisational structure with an adequate apportionment of senior management responsibilities;
  • Compliance resources (i.e. arrangements to assess compliance risks, implement controls and monitor the effectiveness of those controls);
  • Financial crime resources (i.e. arrangements to assess financial crime risks, implement controls and monitor the effectiveness of those controls);
  • Arrangements to collect and analyse Management Information to monitor the effectiveness of your regulatory risk management framework;
  • A suitable business strategy that appropriately manages regulatory risks;
  • Arrangements in place to ensure business continuity and make provision for an orderly wind down in the event of a decision to cease regulated activities; and
  • Arrangements in place to maintain adequate records.

This element of this threshold condition will require CMCs to have a documented compliance framework consisting of policies, procedures and supporting documents (e.g. risk register) to demonstrate that it has appropriate systems and controls in place. In practice, CMCs would need to have an appropriate compliance manual that reflects its business processes and risk profile.

  1. Suitability

The suitability threshold condition is concerned with the fitness and propriety of the firm and its senior managers. The relevant considerations in assessing the fitness and propriety of CMCs includes taking account of historic regulatory action under the CMRU’s regime and the remedial action taken by CMCs to demonstrate suitability. The fitness and propriety of CMCs’ senior management team will assess the character, competence and financial probity of Senior Management Function candidates to ascertain suitability to be entrusted to lead the CMC post-authorisation.

CMCs should ensure that it has taken appropriate remedial action from historic CMRU investigations, letters of warnings and enforcement actions and can demonstrate this to the FCA as part of the authorisation process. CMCs are advised to exercise prudence in the choice of their Senior Management Function candidates and ensure that they are fit and proper.

  1. Business model

The last threshold condition seeks to assess whether CMCs’ business models upholds consumers’ interests, demonstrates integrity and shows that the firm’s affairs will be conducted in a sound and prudent manner. In practice, the FCA will assess the drivers behind the firm’s business model, its products and services (regulated and unregulated), its revenue strategy, its growth strategy, the associated consumer risks within the model and the controls the firm will put in place to safeguard the interest of consumers and deliver positive outcomes.

One of the key documents that is typically submitted with a full permission FCA application is a regulatory business plan which is used by FCA case officers to understand a firm’s business model, the typical customer journey, associated consumer risks and the effectiveness of the controls in place to deliver positive consumer outcomes.

For more information on this, please contact Jourdain Tambo, at jourdain.tambo@claimsmanagementcompliance.co.uk.