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COND 2.1 Threshold condition 1: Legal status

COND 2.1.1 UK

Paragraph 1, Schedule 6 to the Act

3 (1)

If the regulated activity concerned is the effecting or carrying out of contracts of insurance the authorised person must be a body corporate (other than a limited liability partnership), a registered friendly society or a member of Lloyd's.

(2)

If the person concerned appears to the [FSA] to be seeking to carry on, or to be carrying on, a regulated activity constituting accepting deposits, it must be-

5

(a)

a body corporate; or

(b)

a partnership.21

COND 2.1.2 G

Section 40(1) of the Act (Application for permission) allows an application to be made to the FSA for Part IV permission by an individual, a body corporate, a partnership or an unincorporated association. However, in the case of the regulated activities of accepting deposits and effecting or carrying out contracts of insurance, the Banking Consolidation Directive, the First Non-Life Directive and the Consolidated Life Directive4 place further limits on the legal forms a firm may take. The Act implements the provisions of the directives and extends some of these limits to firms that are outside the scope of the directives.

4 4 4 4
COND 2.1.3 G

[deleted]5

5

COND 2.2 Location of offices5

COND 2.2.1 UK

[deleted]5

5

Paragraph 2B of Schedule 6 to the Act

COND 2.2.1A UK
  1. (1)

    Unless sub-paragraph (3), (4)(a) or (7)6 applies, if A is a body incorporated in the United Kingdom -

    6
    1. (a)

      A’s head office, and

    2. (b)

      if A has a registered office, that office,

    must be in the United Kingdom.

  2. (2)

    If A is not a body corporate but A’s head office is in the United Kingdom, A must carry on business in the United Kingdom.

  3. (3)

    If-

    1. (a)

      A is seeking to carry on, or is carrying on, a regulated activity which is any of the investment services and activities,

    2. (b)

      A is a body corporate with no registered office, and

    3. (c)

      A’s head office is in the United Kingdom,

    A must carry on business in the United Kingdom.

  4. (4)

    If A is seeking to carry on, or is carrying on, an insurance mediation activity-

    1. (a)

      where A is a body corporate incorporated in the United Kingdom, A’s registered office, or if A has no registered office, A’s head office, must be in the United Kingdom;

    2. (b)

      where A is an individual, A is to be treated for the purposes of sub-paragraph (2), as having a head office in the United Kingdom if A’s residence is resident in the United Kingdom.

  5. (5)

    “Insurance mediation activity” means any of the following activities-

    1. (a)

      dealing in rights under a contract of insurance as agent;

    2. (b)

      arranging deals in rights under a contract of insurance;

    3. (c)

      assisting in the administration and performance of a contract of insurance;

    4. (d)

      advising on buying or selling rights under a contract of insurance;

    5. (e)

      agreeing to do any of the activities specified in paragraph (a) to (d).

  6. (6)

    Sub-paragraph (5) must be read with-

    1. (a)

      section 22

    2. (b)

      any relevant order under that section; and

    3. (c)

      Schedule 2.

  7. (7)

    6If A is seeking to carry on, or is carrying on, the regulated activity of managing an AIF and is, or upon being granted Part 4A permission to carry on that regulated activity would be, a full-scope UK AIFM, A’s head office and registered office must be in the United Kingdom.

COND 2.2.1B G

5Paragraph 2B of Schedule 6 to the Act sets out the location of offices threshold condition for firms carrying on, or seeking to carry on, regulated activities which do not include a PRA-regulated activity.

COND 2.2.1C G

5The FCA is not responsible for the location of offices threshold condition for firms carrying on, or seeking to carry on, regulated activities which include a PRA-regulated activity.

COND 2.2.2 G
6

Paragraph 2B(1) of Schedule 6 to the Act implements article 7(1)(d) of the UCITS Directive, paragraphs 2B(1) to 2B(23) of Schedule 6 to the Act implement article 5(4) of MiFID, paragraph 2B(4) of Schedule 6 to the Act implements article 2.9 of the Insurance Mediation Directive and paragraph 2B(7) of Schedule 6 to the Act implements article 8(1)(e) of AIFMD, although the Act extends the threshold condition set out in paragraph 2B of Schedule 6 of the Act to authorised persons that are not PRA-authorised persons who are outside the scope of these Single Market Directives.6

COND 2.2.3 G

Neither the UCITS Directive6, MiFID,3 the Insurance Mediation Directive, AIFMD6 nor the Act define what is meant by a firm's 'head office'. This is not necessarily the firm's place of incorporation or the place where its business is wholly or mainly carried on. Although the FCA5 will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control, that is, the location of: 1

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  1. (1)

    the directors and other senior management, who make decisions relating to the firm's central direction, and the material management decisions of the firm on a day-to-day basis; and

  2. (2)

    the central administrative functions of the firm (for example, central compliance, internal audit).

COND 2.3 Effective supervision6

COND 2.3.1 UK

[deleted]6

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Paragraph 2C of Schedule 6 to the Act

COND 2.3.1A UK
  1. (1)

    6A must be capable of being effectively supervised by the FCA having regard to all the circumstances including-

    1. (a)

      the nature (including the complexity) of the regulated activities that A carries on or seeks to carry on;

    2. (b)

      the complexity of any products that A provides or will provide in carrying on those activities;

    3. (c)

      the way in which A’s business is organised;

    4. (d)

      if A is a member of a group, whether membership of the group is likely to prevent the FCA’s effective supervision of A;

    5. (e)

      whether A is subject to consolidated supervision required under any of the relevant directives;

    6. (f)

      if A has close links with another person (“CL”)-

      1. (i)

        the nature of the relationship between A and CL;

      2. (ii)

        whether those links are or that relationship is likely to prevent the FCA’s effective supervision of A; and

      3. (iii)

        if CL is subject to the laws, regulations or administrative provisions of a territory which is not an EEA State (“the foreign provisions”), whether those foreign provisions, or any deficiency in their enforcement, would prevent the FCA’s effective supervision of A.

  2. (1A)

    7Paragraphs (a), (b) and (e) of sub-paragraph (1) do not apply where the only regulated activities that the person concerned carries on, or seeks to carry on, are-

    1. (a)

      relevant credit activities, and

    2. (b)

      if any, activities to which, by virtue of section 39(1D), sections 20(1) and (1A) and 23(1A) do not apply when carried on by the person.

  3. (2)

    A has close links with CL if-

    1. (a)

      CL is a parent undertaking of A;

    2. (b)

      CL is a subsidiary undertaking of A;

    3. (c)

      CL is a parent undertaking of a subsidiary undertaking of A;

    4. (d)

      CL is a subsidiary undertaking of a parent undertaking of A;

    5. (e)

      CL owns or controls 20% or more of the voting rights or capital of A; or

    6. (f)

      A owns or controls 20% or more of the voting rights or capital of CL.

COND 2.3.1B G

6Paragraph 2C of Schedule 6 to the Act sets out the effective supervision threshold condition for firms carrying on, or seeking to carry on, regulated activities which do not include a PRA-regulated activity.

COND 2.3.1BA G

7For the purposes of paragraph 2C (1A) of Schedule 6 to the Act, relevant credit activity is defined in paragraph 2G of Schedule 6 to the Act. Guidance on the meaning of relevant credit activity is given in COND 1.1A.5A G.

Paragraph 3B of Schedule 6 to the Act

COND 2.3.1C UK
  1. (1)

    6B must be capable of being effectively supervised by the FCA having regard to all the circumstances including-

    1. (a)

      the nature (including the complexity) of the regulated activities that B carries on or seeks to carry on;

    2. (b)

      the complexity of any products that B provides or will provide in carrying on those activities;

    3. (c)

      the way in which B’s business is organised;

    4. (d)

      if B is a member of a group, whether membership of the group is likely to prevent the FCA’s effective supervision of B;

    5. (e)

      whether B is subject to consolidated supervision required under any of the relevant directives;

    6. (f)

      if B has close links with another person (“CL”)-

      1. (i)

        the nature of the relationship between B and CL;

      2. (ii)

        whether those links are or that relationship is likely to prevent the FCA’s effective supervision of B; and

      3. (iii)

        if CL is subject to the laws, regulations or administrative provisions of a territory which is not an EEA State (“the foreign provisions”), whether those foreign provisions, or any deficiency in their enforcement, would prevent the FCA’s effective supervision of B.

  2. (2)

    B has close links with CL if-

    1. (a)

      CL is a parent undertaking of B;

    2. (b)

      CL is a subsidiary undertaking of B;

    3. (c)

      CL is a parent undertaking of a subsidiary undertaking of B;

    4. (d)

      CL is a subsidiary undertaking of a parent undertaking of B;

    5. (e)

      CL owns or controls 20% or more of the voting rights or capital of B; or

    6. (f)

      B owns or controls 20% or more of the voting rights or capital of CL.

COND 2.3.1D G

6Paragraph 3B of Schedule 6 to the Act sets out the effective supervision threshold condition which is relevant to the discharge by the FCA of its functions under the Act in relation to firms carrying on, or seeking to carry on, regulated activities which include a PRA-regulated activity.

COND 2.3.1E G

6The guidance in COND 2.3 should be read as applying to both paragraph 2C of Schedule 6 of the Act and, as far as relevant to the discharge by the FCA of its functions under the Act in respect of firms carrying on, or seeking to carry on, a PRA-regulated activity, paragraph 3B of Schedule 6 of the Act.

COND 2.3.1F G

6 Firms carrying on, or seeking to carry on, a PRA-regulated activity, should note that the PRA is also responsible for assessing effective supervision under its own threshold conditions. Paragraphs 4F and 5F of Schedule 6 to the Act set out the effective supervision threshold conditions which are relevant to the discharge by the PRA of its functions under the Act in relation to firms carrying on, or seeking to carry on, a PRA-regulated activity. For the avoidance of doubt, this guidance does not apply to the threshold conditions set out in paragraphs 4F and 5F of Schedule 6 to the Act.

COND 2.3.2 G

Paragraphs 2C and 3B of Schedule 6 to the Act6 implements requirements of the Single Market Directives8, but the Act extends this condition to firms from outside the EEA and other firms which are outside the scope of the Single Market Directives.

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COND 2.3.3 G

In assessing the threshold conditions set out in paragraphs 2C and 3B of Schedule 6 to the Act6, factors which the FCA6 will take into consideration include, among other things, whether:

6
  1. (1)

    it is likely that the FCA6 will receive adequate information from the firm, and those persons with whom the firm has close links, to enable it to determine whether the firm is complying with the requirements and standards under the regulatory system for which the FCA is responsible6 and to identify and assess the impact on its statutory objectives6; this will include consideration of whether the firm is ready, willing and organised to comply with Principle 11 (Relations with regulators and the rules in SUP on the provision of information to the FCA6;

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  2. (2)

    the structure and geographical spread of the firm, the group to which it belongs and other persons with whom the firm has close links, might hinder the provision of adequate and reliable flows of information to the FCA6; factors which may hinder these flows include the fact there may be branches or connected companies in territories which supervise companies to a different standard or territories with laws which restrict the free flow of information, although the FCA6 will consider the totality of information available from all sources; and6

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  3. (3)

    [deleted]6

    6
  4. (4)

    in respect of a firm not carrying on, or seeking to carry on, a PRA-regulated activity,6 it is possible to assess with confidence the overall financial position of the group at any particular time; factors which may make this difficult include lack of audited consolidated accounts for a group, if companies in the same group as the firm have different financial years and accounting dates and if they do not share common auditors.

COND 2.3.4 G

[deleted]6

6
COND 2.3.5 G

[deleted]6

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Meaning of "parent undertaking" and "subsidiary undertaking"

COND 2.3.6 G
  1. (1)

    Section 420(1) of the Act (Parent and subsidiary undertaking) states that, except in relation to an incorporated friendly society, 'parent undertaking' and 'subsidiary undertaking' have the same meaning as in the Companies Acts (see section 1162 of, and schedule 7 to, the Companies Act 2006)4. These are the cases referred to in COND 2.3.7 G (1)(a) to (f).

    4
  2. (2)

    Section 420(2) of the Act supplements these definitions in two ways; these are the cases referred to in COND 2.3.7 G (1)(g) and (h).

  3. (3)

    Paragraph 1A6of Schedule 6 to the Act extends the meaning of 'subsidiary undertaking' for the purposes of the threshold conditions6 to all the cases in articles 1(1) and (2) of the Seventh Company Law Directive in which one undertaking may be a subsidiary of another undertaking (see COND 2.3.11 G).

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COND 2.3.7 G
  1. (1)

    For the purposes of the threshold conditions set out in paragraphs 2C and 3B of Schedule 6 to the Act,6 and except in relation to an incorporated friendly society, an undertaking is a parent undertaking of another undertaking (a subsidiary undertaking) if any of the following apply to it:

    6
    1. (a)

      it holds a majority of the voting rights in the subsidiary undertaking; or

    2. (b)

      it is a member of the subsidiary undertaking and has the right to appoint or remove a majority of its board of directors; or

    3. (c)

      it has the right to exercise a dominant influence over the subsidiary undertaking through:

      1. (i)

        provisions contained in the subsidiary undertaking's memorandum or articles; or

      2. (ii)

        a control contract; or

    4. (d)

      it is a member of the subsidiary undertaking and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in the subsidiary undertaking; or

    5. (e) 445

      it has the power to exercise, or actually exercises, dominant influence or control over it, or it and the subsidiary undertaking are managed on a unified basis; or5

    6. (f)

      it is a parent undertaking of a parent undertaking of the subsidiary undertaking; or

    7. (g)

      it is an individual and would be a parent undertaking if it were an undertaking; or

    8. (h)

      it is incorporated in or formed under the law of another EEA State and is a parent undertaking within the meaning of any rule of law in that State for purposes connected with implementation of the Seventh Company Law Directive.

  2. (2)

    [deleted]6

    6
COND 2.3.8 G
  1. (1)

    In relation to COND 2.3.7 G (1)(b) and (d), an undertaking is treated as a member of another undertaking if any of its subsidiary undertaking is a member of that undertaking, or if any shares in that other undertaking are held by a person acting on behalf of the undertaking or any of its subsidiary undertakings.

  2. (2)

    [deleted]5

    5
  3. (3)

    [deleted]5

    35
COND 2.3.9 G

The provisions of Schedule 74to the Companies Act 20064(Parent and subsidiary undertakings:4 supplementary provisions) explain and supplement the provisions of section 1162 4of the Companies Act 20064(outlined in COND 2.3.7 G (1)(a) to (f)).

4 4 4 4
COND 2.3.10 G

Section 420(3) of the Act (Parent and subsidiary undertaking) states that an incorporated friendly society is a parent undertaking of another body corporate (a subsidiary undertaking) if it has the following relationship to it:

6
  1. (1)

    it holds a majority of the voting rights in the subsidiary undertaking; or

  2. (2)

    it is a member of the subsidiary undertaking and has the right to appoint or remove a majority of the subsidiary undertaking's board of directors; or

  3. (3)

    it is a member of the subsidiary undertaking and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in it.

COND 2.3.11 G

For the purposes of6 the threshold conditions set out in paragraphs 2C and 3B of Schedule 6 to the Act6, an undertaking is a subsidiary undertaking of another undertaking if:

6
  1. (1)

    the other undertaking (its parent) is a member of the undertaking;

  2. (2)

    a majority of the undertaking's board of directors who have held office during the financial year and during the preceding financial year have been appointed solely as a result of the exercise of the parent's voting rights; and

  3. (3)

    no one else is the parent undertaking of the undertaking under COND 2.3.7 G (1)(a) or COND 2.3.10 G (1).

COND 2.3.11A G

5Paragraphs 2C(2)(e) and (f) and 3B(2)(e) and (f)6 of Schedule 6 to the Act reflect legislation initially introduced in the Post-BCCI Directive, which defines close links, in part, by reference to participation. Recital 5 of the Post-BCCI Directive gives further guidance on what is meant by ‘participation’ for the purposes of the directive. It states that the sole fact of having acquired a significant proportion of a company’s capital does not constitute participation for the purposes of the directive if that holding has been acquired solely as a temporary investment which does not make it possible to exercise influence over the structure or financial policy of the undertaking.

6
COND 2.3.12 G

The guidance in COND 2.3 is not comprehensive and is not a substitute for consulting the relevant legislation, for example the Companies Act 2006,4 the Friendly Societies Act 1992 and the Seventh Company Law Directive, or obtaining appropriate professional advice.

4

COND 2.4 Appropriate resources8

COND 2.4.1 UK

[deleted]8

8

Paragraph 2D of Schedule 6 to the Act

COND 2.4.1A UK
  1. (1)

    8The resources of A must be appropriate in relation to the regulated activities that A carries on or seeks to carry on.

  2. (2)

    The matters which are relevant in determining whether A has appropriate resources include-

    1. (a)

      the nature and scale of the business carried on, or to be carried on, by A;

    2. (b)

      the risks to the continuity of the services provided by, or to be provided by, A; and

    3. (c)

      A’s membership of a group and any effect which that membership may have.

  3. (3)

    Except in a case within sub-paragraph (3A), the9 matters which are relevant in determining whether A has appropriate financial resources include-

    9
    1. (a)

      the provision A makes and, if A is a member of a group, which other members of the group make, in respect of liabilities; and

    2. (b)

      the means by which A manages and, if A is a member of a group, by which other members of the group manage, the incidence of risk in connection with A’s business.

  4. (3A)

    Where the only regulated activities that A carries on, or seeks to carry on, are-9

    1. (a)

      relevant credit activities, and

    2. (b)

      if any, activities to which, by virtue of section 39(1D), sections 20(1) and (1A) and 23(1A) do not apply when carried on by A,

    A has adequate financial resources if A is capable of meeting A’s debts as they fall due.

  5. (4)

    The matters which are relevant in determining whether A has appropriate non-financial resources include-

    1. (a)

      the skills and experience of those who manage A’s affairs;

    2. (b)

      whether A’s non-financial resources are sufficient to enable A to comply with -

      1. (i)

        requirements imposed or likely to be imposed on A by the FCA in the course of the exercise of its functions;

      2. (ii)

        any other requirement in relation to whose contravention the FCA would be the appropriate regulator for the purposes of any provision of Part 14 of this Act.

COND 2.4.1B G

8Paragraph 2D of Schedule 6 to the Act sets out the appropriate resources threshold condition for firms carrying on, or seeking to carry on, regulated activities which do not include a PRA-regulated activity.

COND 2.4.1BA G

9For the purposes of paragraph 2D (3A) of Schedule 6 to the Act, relevant credit activity is defined in paragraph 2G of Schedule 6 to the Act. Guidance on the meaning of relevant credit activity is given in COND 1.1A.5A G.

Paragraph 3C of Schedule 6 to the Act

COND 2.4.1C UK
  1. (1)

    The non-financial resources of B must be appropriate in relation to the regulated activities that B carries on or seeks to carry on, having regard to the operational objectives of the FCA.

  2. (2)

    The matters which are relevant in determining whether the condition in sub-paragraph (1) is met include-

    1. (a)

      the nature and scale of the business carried on, or to be carried on, by B;

    2. (b)

      the risks to the continuity of the services provided by, or to be provided by, B;

    3. (c)

      B’s a member of a group and any effect which that membership may have;

    4. (d)

      the skills and experience of those who manage B’s affairs;

    5. (e)

      whether B’s non-financial resources are sufficient to enable B to comply with-

      1. (i)

        requirements imposed or likely to be imposed on B by the FCA in the exercise of its functions; or

      2. (ii)

        any other requirement in relation to whose contravention the FCA would be the appropriate regulator for the purpose of any provision of Part 14 of this Act.

COND 2.4.1D G

8Paragraph 3C of Schedule 6 to the Act sets out the appropriate non-financial resources threshold condition which is relevant to the discharge by the FCA of its functions under the Act in relation to firms carrying on, or seeking to carry on, regulated activities which include a PRA-regulated activity.

COND 2.4.1E G

8The guidance in COND 2.4 should be read as applying to both paragraph 2D of Schedule 6 of the Act and, as far as relevant to the discharge by the FCA of its functions in respect of firms carrying on, or seeking to carry on, a PRA-regulated activity under the Act, paragraph 3C of Schedule 6 of the Act.

COND 2.4.1F G

8As the threshold condition set out in paragraph 3C of Schedule 6 to the Act does not relate to financial resources, the guidance in COND 2.4 relating to appropriate financial resources only applies to the FCA's assessment of the threshold condition set out in paragraph 2D of Schedule 6 of the Act.

COND 2.4.1G G

8 Firms carrying on, or seeking to carry on, a PRA-regulated activity, should note that the PRA is responsible for assessing their financial resources. Paragraphs 4D and 5D of Schedule 6 to the Act contain the threshold conditions relating to financial resources which are relevant to the discharge by the PRA of its functions under the Act in relation to firms carrying on, or seeking to carry on, a PRA-regulated activity (in addition to additional non-financial resources threshold conditions which are also relevant to the discharge by the PRA of its functions). For the avoidance of doubt, this guidance does not apply to threshold conditions set out in paragraphs 4D and 5D of Schedule 6 to the Act.

COND 2.4.2 G
  1. (1)

    [deleted]8

    8
  2. (2)

    In this context, the FCA will interpret the term 'appropriate88' as meaning sufficient in terms of quantity, quality and availability, and 'resources' as including all financial resources (though only in the case of firms not carrying on, or seeking to carry on, a PRA-regulated activity)8, non-financial resources and means of managing its resources; for example, capital, provisions against liabilities, holdings of or access to cash and other liquid assets, human resources and effective means by which to manage risks.

    8
  3. (2A)

    Paragraph 1A(2) of Schedule 6 to the Act provides that “non-financial resources” of a firm for the purposes of the threshold conditions include any systems, controls, plans or policies that the firm maintains and the human resources that the firm has available.8

  4. (3)

    High level systems and control requirements are in SYSC. 3The FCA8 will consider whether the firm is ready, willing and organised to comply with these and other applicable systems and controls8 requirements when assessing if it has appropriate non-financial resources for the purpose of the threshold conditions set out in paragraphs 2D and 3C to Schedule 6 of the Act.8 For a Solvency II firm, the PRA Rulebook: Solvency II firms: Conditions Governing Business and Solvency II Regulation (EU) 2015/35 of 10 October 2014 also contain systems and control requirements and the FCA will take these into account.10

    588
  5. (4)

    Detailed financial resources requirements are in the relevant section of the Prudential Standards part of the FCA Handbook, including specific provisions for particular types of regulated activity. The FCA will consider whether firms (other than firms carrying on, or seeking to carry on, PRA-regulated activities) are ready, willing and organised to comply with these requirements when assessing if they have appropriate financial resources for the purposes of the threshold condition set out in paragraph 2D of Schedule 6 to the Act.8

COND 2.4.3 G
  1. (1)

    [deleted]8

    8
  2. (2)

    Although8 it is the firm that is being assessed, the FCA8 may take into consideration the impact of other members of the firm's group on the adequacy of its resources8, where relevant to the discharge of the FCA's functions8. For example, in relation to a firm other than a firm carrying on, or seeking to carry on, a PRA-regulated activity, the FCA8 may assess the consolidated solvency of the group. The FCA's8 approach to the consolidated supervision of such a firm,8 and its group, is in the relevant part of the Prudential Standards part of the FCA8Handbook53.

    85
COND 2.4.4 G
  1. (1)

    [deleted]8

    8
  2. (2)

    Relevant matters to which the FCA may have regard when assessing whether a firm will satisfy, and continue to satisfy, this threshold condition8may include but are not limited to:

    1. (a)

      (in relation to a firm other than a firm carrying on, or seeking to carry on, a PRA-regulated activity),8 whether there are any indications that the firm may have difficulties if the application is granted, at the time of the grant or in the future, in complying with any of the FCA's8 prudential rules (see the relevant part of the Prudential Standards part of the FCA Handbook853);

      858
    2. (b)

      (in relation to a firm other than a firm carrying on, or seeking to carry on, a PRA-regulated activity,8 whether there are any indications that the firm will not be able to meet its debts as they fall due;

    3. (c)

      whether there are any implications for the adequacy of the firm's resources arising from the history of the firm; for example, whether the firm has:

      1. (i)

        been adjudged bankrupt; or

      2. (ii)

        entered into liquidation; or

      3. (iii)

        been the subject of a receiving or administration order; or

      4. (iv)

        had a bankruptcy or winding-up petition served on it; or

      5. (v)

        had its estate sequestrated; or

      6. (vi)

        entered into a deed of arrangement or an individual voluntary agreement (or in Scotland, a trust deed) or other composition in favour of its creditors, or is doing so; or

      7. (vii)

        within the last ten years, failed to satisfy a judgment debt under a court order, whether in the United Kingdom or elsewhere;

    4. (d)

      whether the firm has taken reasonable steps to identify and measure any risks of regulatory concern that it may encounter in conducting its business (see COND 2.4.6 G)10 and has installed appropriate systems and controls and appointed appropriate human resources to measure them prudently at all times. For a Solvency II firm, the PRA Rulebook: Solvency II firms: Conditions Governing Business and Solvency II Regulation (EU) 2015/35 of 10 October 2014 also contain systems and control requirements on these matters and the FCA will take these into account; and10

      8488
    5. (e)

      whether the firm has conducted enquiries into the financial services sector in which it intends to conduct business that are sufficient to satisfy itself that:

      8
      1. (i)

        it has access to adequate capital, by reference to the FCA's8 prudential requirements, to support the business including any losses which may be expected during its start-up period (in relation to a firm other than a firm carrying on, or seeking to carry on, a PRA-regulated activity)8; and

        8
      2. (ii)

        Client money, deposits, custody assets and policyholders' rights will not be placed at risk if the business fails; and8

        8
    6. (f)

      whether the resources of the firm are commensurate with the likely risks it will face.

  3. (3)

    [deleted]8

    8
  4. (4)

    [deleted]8

    8
COND 2.4.5 G

[deleted]8

8
COND 2.4.6 G
  1. (1)

    [deleted]8

    8
  2. (2)

    [deleted]8

  3. (3)

    [deleted]8

    68

COND 2.5 Suitability15

COND 2.5.1 UK

[deleted]15

Paragraph 2E to Schedule 6 of the Act

COND 2.5.1A UK
  1. (1)

    15A must be a fit and proper person having regard to all the circumstances, including-

    1. (a)

      A’s connection with any person;

    2. (b)

      the nature (including the complexity) of any regulated activity that A carries on or seeks to carry on;

    3. (c)

      the need to ensure that A’s affairs are conducted in an appropriate manner, having regard in particular to the interests of consumers and the integrity of the UK financial system;

    4. (d)

      whether A has complied and is complying with requirements imposed by the FCA in the exercise of its functions, or requests made by the FCA, relating to the provision of information to the FCA and, where A has so complied or is so complying, the manner of that compliance;

    5. (e)

      whether those who manage A’s affairs have adequate skills and experience and act with probity;

    6. (f)

      whether A’s business is being, or is to be, managed in such a way as to ensure that its affairs will be conducted in a sound and prudent manner; and

    7. (g)

      the need to minimise the extent to which it is possible for the business carried on by A, or to be carried on by A, to be used for a purpose connected with financial crime.

COND 2.5.1B G

15Paragraph 2E of Schedule 6 to the Act sets out the suitability threshold condition for firms carrying on, or seeking to carry on, regulated activities which do not consist of or include a PRA-regulated activity.

Paragraph 3D to Schedule 6 of the Act

COND 2.5.1C UK
  1. (1)

    15B must be a fit and proper person, having regard to the operational objectives of the FCA.

  2. (2)

    The matters which are relevant in determining whether B satisfies the condition in sub-paragraph (1) include-

    1. (a)

      B’s connection with any person;

    2. (b)

      the nature (including the complexity) of any regulated activity that B carries on or seeks to carry on;

    3. (c)

      the need to ensure that B’s affairs are conducted in an appropriate manner, having regard in particular to the interests of consumers and the integrity of the UK financial system;

    4. (d)

      whether B has complied and is complying with requirements imposed by the FCA in the exercise its functions, or requests made by the FCA, relating to the provision of information to the FCA and, where B has so complied or is so complying, the manner of that compliance;

    5. (e)

      whether those who manage B’s affairs have adequate skills and experience and act with probity; and

    6. (f)

      the need to minimise the extent to which it is possible for the business carried on by B, or to be carried on by B, to be used for a purpose connected with financial crime.

COND 2.5.1D G

15Paragraph 3D of Schedule 6 to the Act sets out the suitability threshold condition which is relevant to the discharge by the FCA of its functions under the Act in relation to firms carrying on, or seeking to carry on, regulated activities which include a PRA-regulated activity.

COND 2.5.1E G

15The guidance in COND 2.5 should be read as applying to both paragraph 2E of Schedule 6 to the Act and, as far as relevant to the discharge by the FCA of its functions under the Act in respect of firms carrying on, or seeking to carry on, a PRA-regulated activity, paragraph 3D of Schedule 6 of the Act.

COND 2.5.1F G

15 Firms carrying on, or seeking to carry on, a PRA-regulated activity, should note that the PRA is also responsible for assessing suitability under its own threshold conditions. Paragraphs 4E and 5E of Schedule 6 to the Act set out the suitability threshold conditions which are relevant to the discharge by the PRA of its functions under the Act in relation to firms carrying on, or seeking to carry on, a PRA-regulated activity. For the avoidance of doubt, this guidance does not apply to the threshold conditions set out in paragraph 4E and 5E of Schedule 6 to the Act.

COND 2.5.2 G
  1. (1)

    [deleted]15

    15
  2. (2)

    The FCA15 will also take into consideration anything that could influence a firm's continuing ability to satisfy the threshold conditions set out in paragraphs 2E and 3D of Schedule 6 to the Act15. Examples include the firm's position within a UK or international group, information provided by overseas regulators about the firm, and the firm's plans to seek to vary its Part 4A permission15 to carry on additional regulated activities once it has been granted that permission.

    15151515
COND 2.5.3 G
  1. (1)

    The emphasis of the threshold conditions set out in paragraphs 2E and 3D of Schedule 6 of the Act15 is on the suitability of the firm itself. The suitability of each person who performs a controlled function will be assessed by the FCA and/or the PRA, as appropriate,15 under the approved persons regime (in relation to an FCA-approved person, 16see SUP 10A (FCA Approved Persons), SUP 10C (FCA senior management regime for approved persons in relevant authorised persons)16 and FIT). In certain circumstances, however, the FCA15 may consider that the firm is not suitable because of doubts over the individual or collective suitability of persons connected with the firm.

    1515815
  2. (2)

    [deleted]15

    15
  3. (3)

    [deleted]15

    15
COND 2.5.4 G
  1. (1)

    [deleted]15

    15
  2. (2)

    Examples of the kind of general considerations to which the FCA may have regard when assessing whether a firm will satisfy, and continue to satisfy, the threshold conditions set out in paragraphs 2E and 3D of Schedule 6 to the Act include, but are not limited to, whether the firm:15

    15
    1. (a)

      conducts, or will conduct, its business with integrity and in compliance with proper standards;

    2. (b)

      has, or will have, a competent and prudent management; and

    3. (c)

      can demonstrate that it conducts, or will conduct, its affairs with the exercise of due skill, care and diligence.

  3. (3)

    [deleted]15

    15
  4. (4)

    [deleted]15

    15
COND 2.5.5 G

[deleted]15

15
15
COND 2.5.6 G

Examples of the kind of particular considerations to which the FCA may have regard when assessing whether a firm will satisfy, and continue to satisfy, this threshold condition include, but are not limited to, whether:15

15
  1. (1)

    the firm has been open and co-operative in all its dealings with the FCA15and any other regulatory body (see Principle 11 (Relations with regulators)) and is ready, willing and organised to comply with the requirements and standards under the regulatory system (such as the detailed requirements of SYSC and, in relation to a firm not carrying on, or seeking to carry on, a PRA-regulated activity only, the Prudential Standards part of the FCA Handbook)15in addition to15 other legal, regulatory and professional obligations; the relevant requirements and standards will depend on the circumstances of each case, including the regulated activities which the firm has permission, or is seeking permission, to carry on;

    1515
  2. (1A)

    the firm has made arrangements to put in place an adequate system of internal control to comply with the requirements and standards for which the FCA is responsible under the regulatory system;15

  3. (2)

    the firm has been convicted, or is connected with a person who has been convicted, of any criminal offence; this must include, where provided for by the Rehabilitation Exceptions Orders14 to the Rehabilitation of Offenders Act 1974 or the Rehabilitation of Offenders (Northern Ireland) Order 1978 (as applicable)14, any spent convictions; particular consideration will be given to offences of dishonesty, fraud, financial crime or an offence under legislation relating to companies, building societies, industrial and provident societies, credit unions, friendly societies, banking,14 other financial services, insolvency, consumer credit companies, insurance, consumer protection, money laundering, market manipulation and14insider dealing8, whether or not in the United Kingdom1514;

    8141414141415
  4. (3)

    the firm has been the subject of, or connected to the subject of, any existing or previous investigation or enforcement proceedings by the FCA,15 the Society of Lloyd's or by other regulatory authorities (including the FCA's15 predecessors), clearing houses or exchanges, professional bodies or government bodies or agencies; the FCA15 will, however, take both the nature of the firm's involvement in, and the outcome of, any investigation or enforcement proceedings into account in determining whether it is a relevant matter;

    15
  5. (4)

    the firm has contravened, or is connected with a person who has contravened, any provisions of the Act or any preceding financial services legislation, the regulatory system or the rules, regulations, statements of principles or codes of practice (for example the Society of Lloyd's Codes) of other regulatory authorities (including the FCA's15 predecessors), clearing houses or exchanges, professional bodies, or government bodies or agencies or relevant industry standards (such as the Non-Investment Products Code); the FCA15 will, however, take into account both the status of codes of practice or relevant industry standards and the nature of the contravention (for example, whether a firm has flouted or ignored a particular code);

    1515
  6. (5)

    the firm, or a person connected with the firm, has been refused registration, authorisation, membership or licence to carry out a trade, business or profession or has had that registration, authorisation, membership or licence revoked, withdrawn or terminated, or has been expelled by a regulatory or government body; whether the FCA15 considers such a refusal relevant will depend on the circumstances;

    15
  7. (6)

    [deleted]1513

    1515
  8. (7)

    the firm has put in place procedures which are reasonably designed to:

    1. (a)

      ensure that it has made its employees aware of, and compliant with, those requirements and standards under the regulatory system that apply to the firm for which the FCA is responsible15 and the regulated activities for which it has, or will have permission;

    2. (b)

      ensure that its approved persons and, in the case of relevant authorised persons, the rest of its conduct rules staff16are aware of those requirements and standards under the regulatory system applicable to them, whether or not they are employed by the firm;16

    3. (c)

      determine that its employees are acting in a way compatible with the firm adhering to those requirements and standards; and

    4. (d)

      determine that its approved persons and, in the case of relevant authorised persons, the rest of its conduct rules staff, 16are adhering to those requirements and standards;

  9. (8)

    the firm or a person connected with the firm has been dismissed from employment or a position of trust, fiduciary relationship or similar or has ever been asked to resign from employment in such a position; whether the FCA15 considers a resignation to be relevant will depend on the circumstances, for example if a firm is asked to resign in circumstance that cast doubt over its honesty or integrity;

    1515
  10. (9)

    the firm or a person connected with the firm has ever been disqualified from acting as a director;15

  11. (10)

    the governing body of the firm is made up of individuals with an appropriate range of skills and experience to understand, operate and manage the firm'sregulated activities;15

  12. (11)

    where appropriate, the governing body of the firm includes non-executive representation, at a level which is appropriate for the control of the regulated activities proposed, for example, as members of an audit committee;15

  13. (12)

    those persons who perform controlled functions under certain arrangements entered into by the firm or its contractors (including appointed representatives or, where applicable, tied agents) act with due skill, care and diligence in carrying out their controlled function (see APER 4.2 (Statement of Principle 2) or managing the business for which they are responsible (see APER 4.7 (Statement of Principle 7));15

  14. (13)

    the firm, or a person connected with the firm, has been a director, partner or otherwise concerned in the management of a company, partnership or other organisation or business that has gone into insolvency, liquidation or administration while having been connected with that organisation or within one year of such a connection;15

  15. (14)

    the governing body of the firm is organised in a way that enables it to address and control the regulated activities of the firm, including those carried on by managers to whom particular functions have been delegated;15

  16. (15)

    the firm has developed human resources policies and procedures that are reasonably designed to ensure that it employs only individuals who are honest and committed to high standards of integrity in the conduct of their activities;15

  17. (16)

    the firm has taken reasonable care to ensure that robust information and reporting systems have been developed, tested and properly installed;15

  18. (17)

    the firm has in place appropriate systems and controls against financial crime, including, for example, money laundering;15

  19. (18)

    in the case of a firm that carries on insurance mediation activity:

    1. (a)

      a reasonable proportion of the persons within its management structure who are responsible for the insurance mediation activity; and15

    2. (b)

      all other persons directly involved in its insurance mediation activity;15

    demonstrate the knowledge and ability necessary for the performance of their duties; and15

    1. (c)

      all the persons in the firm's management structure and any staff directly involved in insurance mediation activity are of good repute (see MIPRU 2.3.1 R (Knowledge, ability and good repute); and15

  20. (19)

    where appropriate, the firm has appointed auditors and actuaries, who have sufficient experience in the areas of business to be conducted.15

COND 2.5.7 G
9

[deleted]15

COND 2.7 Business model

Paragraph 2F to Schedule 6 of the Act

COND 2.7.1 UK
  1. (1)

    1A’s business model (that is, A’s strategy for doing business) must be suitable for a person carrying on the regulated activities that A carries on or seeks to carry on.

  2. (2)

    The matters which are relevant in determining whether A satisfies the condition in sub-paragraph (1) include-

    1. (a)

      whether the business model is compatible with A’s affairs being conducted, and continuing to be conducted, in a sound and prudent manner;

    2. (b)

      the interests of consumers;

    3. (c)

      the integrity of the UK financial system.

  3. (3)

    This paragraph does not apply where the only regulated activities that the person concerned carries on, or seeks to carry on, are-2

    1. (a)

      relevant credit activities, and

    2. (b)

      if any, activities to which, by virtue of section 39(1D), sections 20(1) and (1A) and 23(1A) do not apply when carried on by the person.

COND 2.7.2 G

1Paragraph 2F of Schedule 6 to the Act sets out the business model threshold condition for firms carrying on, or seeking to carry on, regulated activities which do not include a PRA-regulated activity.

COND 2.7.2A G

2For the purposes of paragraph 2F(3) of Schedule 6 to the Act, relevant credit activity is defined in paragraph 2G of Schedule 6 to the Act. Guidance on the meaning of relevant credit activity is given in COND 1.1A.5A G.

Paragraph 3E to Schedule 6 of the Act

COND 2.7.3 UK

1B’s business model (that is, B’s strategy for doing business) must be suitable for a person carrying on the regulated activities that B carries on or seeks to carry on, having regard to the FCA’s operational objectives.

COND 2.7.4 G

1Paragraph 3E of Schedule 6 to the Act sets out the business model threshold condition which is relevant to the discharge by the FCA of its functions under the Act in relation to firms carrying on, or seeking to carry on, regulated activities which include a PRA-regulated activity.

COND 2.7.5 G

1The guidance in COND 2.7 should be read as applying to both paragraph 2F of Schedule 6 to the Act and, as far as relevant to the discharge by the FCA of its functions under the Act in respect of firms carrying on, or seeking to carry on, a PRA-regulated activity, paragraph 3E of Schedule 6 of the Act.

COND 2.7.6 G

1 Firms carrying on, or seeking to carry on, a PRA-regulated activity, should note that the PRA states in its Approach Documents that analysis of such firms' business models will form an important part of the PRA's supervisory approach. For the avoidance of doubt, this guidance does not apply to the PRA's own assessment of the firms' business models.

COND 2.7.7 G

1In assessing whether the threshold conditions set out in paragraphs 2F and 3E of Schedule 6 to the Act are satisfied, the FCA may consider all matters that might affect the design and execution of a firm's business model, taking into account the nature, scale and complexity of a firm's business.

COND 2.7.8 G

1In deciding how they will satisfy and continue to satisfy the threshold conditions set out in paragraphs 2F and 3E of Schedule 6 to the Act, firms should consider matters including (but not limited to) the following:

  1. (1)

    the assumptions underlying the firm's business model and justification for it;

  2. (2)

    the rationale for the business the firm proposes to do or continues to do, its competitive advantage, viability and the longer-term profitability of the business;

  3. (3)

    the needs of and risks to consumers;

  4. (4)

    the expectations of stakeholders, for example, shareholders and regulators;

  5. (5)

    the products and services being offered and product strategy;

  6. (6)

    the governance and controls of the firm and of any member of its group (if appropriate);

  7. (7)

    the growth strategy and any risks arising from it;

  8. (8)

    any diversification strategies; and

  9. (9)

    the impact of the external macroeconomic and business environment.

COND 2.7.9 G

1 Firms should consider the manner in which they intend to bring their business model into operation. This plan could, for example, include matters such as procurement, outsourcing, and recruitment.

COND 2.7.10 G

1 Firms should consider scenarios which may negatively impact on the firm's business model with a view to ensuring the sustainability of the firm and, further, to consider the vulnerability of the business model to specific events and the risks and consequences that might arise. Where appropriate, this might include reverse stress-testing (see SYSC 20 ‘Reverse stress testing’). A firm should put in place a credible plan to minimise the risks that it identifies from, or in relation to, its business model and a contingency plan for dealing with risks that have crystallised.

COND 2.7.11 G

1Firms should ensure that any adjustments to its business model:

  1. (1)

    are approved at an appropriate level in the business;

  2. (2)

    are considered in the light of any potential risks, impacts and consequences of the proposed changes; and

  3. (3)

    appropriately take into account the needs of and risks to clients and relevant consumers.

COND 2.7.12 G

1The FCA's assessment of a firm's satisfaction of this threshold conditions set out in paragraphs 2F and 3E of Schedule 6 to the Act will not necessarily be limited to a firm'sregulated activities if the FCA believes the firm's other business activities, if any, may impact on a firm'sregulated activities.