global insurance management

Threshold Conditions


Jun 24 2013

Threshold Conditions 

Relevance:                   All FCA-authorised firms.

Action required:           Ensure you can meet the requirements of the new Threshold Conditions.

What are threshold conditions?

Threshold Conditions (TCs) are effectively the minimum standards for being, and remaining, authorised by the Financial Conduct Authority (FCA).  Maintaining these is an ongoing requirement, and the FCA can vary or cancel a firm’s permission if it believes that that firm is failing, or likely to fail, to meet them.

That is more than enough reason for making sure that your firm can satisfactorily demonstrate that it continues to meet the required TCs.

A review of TCs was deemed necessary due to the split of regulatory responsibility between the FCA and the Prudential Regulation Authority (PRA).  FCA TCs will apply to all, including those dual regulated firms subject to both PRA and FCA regulation.

Under the FSA regime, the TCs were Legal Status, Location of Offices, Close Links, Adequate Resources and Suitability.

The FCA will now monitor the following areas:

  • Location of Offices;
  • Effective Supervision;
  • Appropriate Resources;
  • Suitability;
  • Business Model.

The following is a brief overview of what is looked for in maintaining the Threshold Conditions.

Location of Offices:

This TC is unchanged; a firm’s Head office or registered office must be in the UK.

Effective Supervision

This is a new TC.  However, the TC encompasses the previous “Close Links” condition (e.g. the effect of group structures on supervision) and contains a new reference to the nature of the relationship between the firm and another person that will also be the subject of supervision by the FCA/ PRA.

A firm must be capable of being effectively supervised by the FCA in regard to all circumstances including;

  • the nature and complexity of its regulated activities;
  • the complexity of its products; and
  • the way in which its business is organised.

Appropriate Resources

This TC has changed from ‘adequate resources’.  It covers Financial and non-Financial items for FCA regulated firms, but only non-Financial items for dual regulated firms.

Previously the types of resources that a firm should review were:

  • financial;
  • the knowledge and competency of staff;
  • business assets – premises, technology and fixtures and fittings; and
  • the level and type of your insurance cover.

The revised TC includes additional references to;

  • the nature and scale of the firm’s business;
  • the risks to the continuity of the business; and
  • the skills and experience of the firm’s management.

Suitability

The FSA had to be satisfied that the firm was “fit and proper” to be authorised.  In assessing this, the FSA looked at the competence and ability of management, as well as its commitment to carrying on the business with integrity and in compliance with the regulatory regime.

Under the FCA, the TC has been amended and contains additional references to the firm’s affairs being conducted in an appropriate manner with regards to the interests of consumers, the integrity of the UK financial system and the need to minimise the extent to which the business carried on by a firm can be used for a purpose connected with financial crime. Also, firms must be generally cooperative in the provision of information to the FCA.

Business Model

It seems that even though the FSA dealt with this area when assessing applications for authorisation, it has now been decided to make it a separate TC of its own accord. So technically, it is not a new TC although the assessment may be more vigorous.

The firm’s business model, i.e. its strategy for doing business, must be suitable. The matters relevant to determining whether this condition is met are:

  • whether the business model is compatible with the firm’s affairs being conducted in a sound and prudent manner;
  • the interests of consumers;
  • the integrity of the UK financial system.

The FCA has given a list of some of the issues firms should consider to prove the strength of their business model and that it is appropriate to the firm’s regulated activities but the the guidance is not specific or exhaustive.  The issues include:

  • the assumptions the firm has relied on, the rationale behind the business model, the pricing and product strategy and the needs of and risks to consumers;
  • how the firm intends to implement its business model, including areas such as outsourcing arrangements;
  • sustainability, for example identifying and mitigating potential risks and contingency plans;
  • areas a firm may wish to consider when its business model changes, such as the risks to and the impact of changes on the consumer.

Conclusion

The expanded threshold conditions will make it easier for the FCA to take action against firms.  In particular the FCA currently sees rigorous business model analysis as the key to an effective supervisory regime that avoids the alleged deficiencies of past approaches.

Firms should expect to be asked how their business model ensures fair treatment of customers; and those whose businesses appear to be outliers in their sectors and anyone applying to change their permissions, should expect greater scrutiny in future.

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