FCA kicks off substance negotiations with EEA firms

05 March 2021

Last month, the UK regulator, the Financial Conduct Authority (FCA), published an approach document detailing how it will assess international financial services firms when they apply to the regulator for authorisation.

It is a timely publication which effectively kicks off the negotiation with around 1,500 EEA firms which entered the UK’s Temporary Permissions Regime (TPR) on 31 December 2020, many of whom have no “boots on the ground” in the UK and were previously operating exclusively on a services basis in the UK under EEA passporting regimes.

Many of these firms will have had almost no contact with the FCA in the past, other than perhaps in recent weeks through the FCA’s issue of “Covid” questionnaires which tap information on a broad range of matters impacting the firm including the scope of their activities into the UK, client money and assets and regulatory capital. Some may not therefore appreciate that they are on the cusp of a negotiation about “substance" with the FCA and the information they feed through the Covid questionnaire may well also help the FCA settle its asking price.

For UK firms the approach document will not come as a surprise: parallel negotiations between UK firms and EEA regulators to agree “substance” requirements are of course largely now complete but were driven by concerns on the EU side, about adequate local risk management and supervision of a firm’s activities, but also by broader trade-related aims after Brexit and the desire to redomicile jobs in the EU. It seems inevitable that the UK negotiations will run a similar path with the FCA driving an equally hard bargain.

Requiring substance in the UK

The approach document sets out, what is for UK regulated firms, innocuous and standard text on being authorised. The FCA’s approach requires that an international firm, like a domestic firm, planning to perform any activity requiring authorisation demonstrates that it:

  • is ready, willing and organised;
  • meets the relevant minimum standards to be authorised under the relevant legislation;
  • meets the FCA’s general expectations, such as in relation to the firm’s systems and controls; and
  • mitigates against the risks of harm it poses.

Crucially, though, the FCA states that it expects a firm to have an active place of business in the UK. It will typically not suffice if a firm’s local presence has little or nothing more than a brass plate/UK registered address.

The FCA also expects senior managers who are directly involved in managing the firm’s UK activities to spend an adequate and proportionate amount of their time in the UK to ensure those activities are suitably controlled. At this stage, the FCA does not take a prescriptive approach to what “adequate and proportionate amount of time in the UK” means in any given circumstances, giving itself flexibility to take account of firm-specific factors.

In the feedback statement to the approach document, the FCA notes that some respondents queried if the FCA should have any expectation of UK establishment at all and requested “services passporting” to be re-introduced. The FCA’s response is of course that its expectation that firms have a UK establishment is based on the existing standards for authorisation and its need to be able to effectively supervise a firm’s UK activities.


While the FCA sees a higher risk of harm from a UK branch as opposed to a subsidiary, it will not necessarily be the case that an international firm needs to set up a local UK subsidiary. The FCA states that its approach is intended to be broad enough to be relevant to firms from different sectors, operating different business models, subject to different rules, and from different countries and that it will assess firms on a case-by-case basis. This is not necessarily much comfort to firms whose business model is predicated upon a hub in the EEA with no local presence in the UK. In many instances subsidiarisation may be to the firm’s favour in any event and avoid the complication of the FCA making assessments on capital requirements, which are intertwined with the whole of the firm’s EEA business.

What is clear is that the need to relocate or hire staff in the UK (whether through a branch or subsidiary)  will depend largely on the outcome of negotiation with the FCA and will need to be set out in considerable detail in the business plan which is filed with the firm’s application for authorisation. These plans will need to be realistic in light of the approach document.

Since it seems highly unlikely that the FCA will be prepared to authorise EEA firms operating in the UK on an entirely remote basis some may be well advised to use their time in the TPR to reassess the scope of the UK regulatory perimeter and whether they might be able to position their business model to stay outside the UK regime, perhaps with some adjustments. Just because a firm previously determined that is should passport into the UK under the relevant EU sectoral directive while the UK was an EU member state does not necessarily mean that it would always be deemed to be conducting business in the UK under the UK’s Financial Services and Markets Act 2000 from a perimeter point of view. This is a different test.

In any event, even if a firm is within the UK perimeter and will require a licence as it leaves the TPR, in order to avoid approaching the negotiation table with an open cheque book, firms would be well advised to seek advice and formulate their proposals at this stage based upon FCA’s range of tolerance to business models it has authorised in the past in their sector.