In part 2 of our fintech guide, we explore the details and differences between getting directly authorised by the FCA, or becoming an Appointed Representative at an Umbrella company. We’ve highlighted the pros and cons to help you clearly understand the nuances and make the right choice for your business
Financial services firms in the UK are heavily regulated, so they need to comply with many rules and regulations. You’ll likely have heard of firms describing themselves as ‘Authorised’ or ‘Regulated’, this is because financial services firms in the UK must get permission from the appropriate regulator before entering the market (check our Part 1 fintech guide for more details).
There are two routes for companies to get permissions for your business: Direct authorisation or become an Appointed Representative.
Choosing to become directly authorised by the FCA means you’ll be independently able to conduct regulated activities and internally regulate yourself as a business. This route would see your business build a compliance function and hire various relevant roles, like a CF30.
But it isn’t plain sailing. The application process is rather lengthy and can take more than six months and often longer. Direct authorisation puts a high ongoing cost and compliance burden on your business – which can be difficult for relatively new fintechs or small fund managers to meet if they have limited cash and staff resources.
The alternative in the UK is to become an Appointed Representative (AR) of an already FCA-authorised firm (called a “Tied Agent” in the European Single Market).
Many authorised firms, like WealthKernel, host multiple ARs on a commercial basis for a fee, and a sizable proportion of start-up managers opt to sign up with them. WealthKernel is a specific type of regulatory umbrella that only offers AR services to investment firms, and those that use our APIs.
However, many AR regulatory umbrellas exist across the financial services industry, supporting other regulated services. Some of these firms operate solely as regulatory umbrellas and compliance specialists as their entire businesses, like our friends at Thistle.
Becoming an AR allows your business to carry out regulated activities by ‘borrowing’ some of the principal’s permissions as an authorised firm. The AR process is much more straightforward than becoming directly authorised and takes a few weeks to be completed.
Your business will still need to meet all FCA requirements, but you won’t have to hold regulatory responsibilities. The AR umbrella offers many benefits including protecting you from hidden costs, compliance risks, and regulatory changes.
In summary, the advantages of choosing to become appointed representative are:
Now that we've discussed the the necessary steps to become regulated in the financial services market, let’s dive into another important part of managing an investment platform, i.e., Safeguarding and administering client assets or, in other words, custody of assets. Check our Part 3 guide for more insight into the world of asset custody.