Building an excellent crowdfunding platform with an impeccable interface and client’s perks sounds challenging; however, getting it authorised with the Financial Conduct Authority is as challenging and time-consuming.
The whole application process takes 6 to 12 months.
Yes, this long.
So if you’re at a very early stage of your P2P lending or online investment startup, we suggest that you start doing your authorisation homework in parallel with the product strategy.
We are not lawyers or compliance consultants, however, based on our research and experience, we’ll shed some light on how the FCA regulates the alternative finance industry, what kind of pitfalls to expect and how to get all things in place and on time.
What is the FCA and what do they do?
The Financial Conduct Authority (FCA) regulates the financial services industry in the UK.
Their main role is to protect consumers, maintain stability in the industry, promote healthy competition among financial service providers and regulate the international money transfer industry.
The FCA competition powers
FCA strictly enforces competition law in the financial sector because it drives the improvement in the quality of services provided and stimulates innovation. If you don’t follow the rules set, you may get a big fine or lose your authorisation completely.
How you could violate this law:
- become the dominant business in the niche;
- establish a low cost to oust competitors and increase prices afterwards;
- refuse to provide services for existing or regular customers without objective justification.
In the UK, this competitive authority is used not only by FCA but also by the Competition and Markets Authority (CMA) in all sectors of the economy.
Authorisation vs registration
Depending on the financial activities you perform, you must be authorised or registered with the FCA. You should understand what kind of relationship you need because both authorisation and registration are required in some cases.
What is the difference?
The registration process takes much less time than authorisation because you will need to send less information about your business.
Let’s take a look at the types of companies which need authorisation in more detail:
- financial services companies;
- firms offering loans;
- companies offering car financing deals or other consumer loans;
- investment firms;
- benchmark administrators (can be both authorised and registered);
- payment services and e-money firms (can be both authorised and registered);
- innovative firms.
The exceptions are banks, credit unions, and insurance companies, which are regulated by both FCA and the Prudential Regulation Authority (PRA).
The main FCA regulations
Regardless of the type of intermediary, you will not be able to get permission unless you comply with FCA standards.
Where to start?
First of all, make sure that you have all the accompanying documentation ready. This is a list of documents the FCA is likely to inquire if you are registering a P2P lending platform:
- regulatory business plan;
- risk management strategy;
- compliance procedures;
- marketing strategy and customer acquisition channels;
- organisational structure;
- proof of systems that prevent anti-money laundering and other financial crime;
- number of loans to be processed each year;
- details about the hold period of the client money, etc.
If you are starting a crowdfunding platform in the UK, you will need to get more permissions from the FCA, such as an individual authorisation of the key personnel who will be assessed regarding integrity and reputation, honesty, competence and capability.
Submitting the necessary documents doesn’t nail it though.
After that, you will enter a long stage of open collaboration with an authorised person from the FCA. There’s a set of threshold conditions that every firm should meet. The main purpose of this screening is to make sure your business is viable.
What you’ll need to do in a nutshell:
- register your office in the UK;
- prove that your business model aligns with the regulated activities your company will perform;
- demonstrate you have the right people, funding, and IT infrastructure to deliver the service or product.
To assess the companies, the FCA use the documents provided with the application, conducts its own market research and analysis, and checks whether there’ve been any complaints with the Financial Ombudsmen Services.
There’s a comprehensive guide into authorisation from the FCA that will help you understand the process better.
The FCA may also verify if you’ve reached out to their Contact Centre and sought the legal or compliance advice. If you did, it proves you are ambitious and take the preparation seriously.
However, that’s not all.
FCA representatives will consider your direct involvement in the authorisation process and will question you every time they are unsure about something in your application.
Be open in all relations with the FCA and show the initiative. This will not only increase your chance of getting the long-awaited permission but also will show that you are ready to make any amendments required in your application.
As we mentioned earlier, the application process doesn’t move with the speed of light and will take you up to 6 months if the application is 100% complete or up to 12 months if not. You should also expect to pay a registration fee.
How to get through the authorisation
You can either take on this compliance adventure on your own or hire an authorised compliance company that will help you.
Often, these compliance firms hire legal practitioners, industry professionals, and ex-regulators who will be able to make the whole thing a smoother sailing.
Remember that the authorised firm takes full responsibility for the FCA rules compliance.
The FCA regulations 2019
Later this year, the FCA plans to publish an updated policy for crowdfunding and P2P lending regulations in the light of their latest findings of poor business practices.
The platforms often fail to clearly explain the risks and the charging structure, don’t state that the investments are not covered by the Financial Services Compensation Scheme (FSCS) and keep the client’s records.
The proposed restrictions will target the marketing materials to decrease controversy in the industry, the disclosure systems to offer more information to the investors, and systems and controls to improve risk management frameworks.
Our observations
Creating online investment platforms, crowdfunding platforms and P2P lending systems is one of our specialities at JustCoded.
Before we start writing the first line of code, we go through a business analysis stage to understand the business model, and the required user/money flows it implies.
Having worked with such projects for more than 5 years now, we have noticed that our clients have quite a few legal challenges that are closely related to the development of the website:
- depending on the services you will provide to users, the type of FCA license varies, and so do the requirements for the platform;
- it’s not always possible to use third-party services. For example, payment systems must accept payments ONLY for purchases in stores, while the purchase of securities is not allowed;
- the licenses of third-party services may expire or even be withdrawn in case of violation of changes in legislation;
- all investment platforms are checked for compliance with laws and other regulations of the FCA. The lack of a single page cautioning of various risks on your site can undo all the work.
Bottomline
Before entering the financial market, make sure that you have conducted a study and know who your competitors are.
Things to remember:
- first of all, the FCA analyse your business plans, risks, budgets, resources, systems and controls;
- the process of getting the authorisation will take from 6 to 12 months, and in the case of banks, it will be up to 2 years;
- before you start expanding your business, you have to go through a six-month trial period;
- you should expect to be checked by the FCA representatives from time to time since one of the tendencies in the FCA at the moment is the conduct risk;
- if your application has been declined, you can submit a new one 🙂
And remember: the FCA is not trying to make your life worse. On the contrary, they understand your goal, and it’s in their best interest to improve the financial service landscape in the UK.
