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EG 8.1 1Introduction

EG 8.1.1

1The FCA has powers under section 55J of the Act to vary or cancel an authorised person’sPart 4A permission and a power under section 55L to impose requirements on an authorised person. The FCA may use these powers where:

  1. (1)

    the person is failing or is likely to fail to satisfy the threshold conditions for which the FCA is responsible;

  2. (2)

    the person has not carried on a regulated activity to which the Part 4A permission relates for a period of at least 12 months (or six months in the case of a full-scope UK AIFM);

  3. (3)

    it is desirable to exercise the power in order to advance one or more of its operational objectives; or

  4. (4)

    the person has failed to comply with a requirement in Part 5 of the AIFMD UK regulation (AIFs which acquire control of non-listed companies and issuers), or it is for some other reason desirable to exercise the power for the purposes of ensuring compliance with such a requirement.

EG 8.1.2

1The powers to vary and cancel a person’s Part 4A permission and to impose requirements are exercisable in the same circumstances. However, the statutory procedure for the exercise of the own-initiative powers is different to the statutory procedure for the exercise of the cancellation power and this may determine how the FCA acts in a given case. Certain types of behaviour which may cause the FCA to cancel permission in one case, may lead it to impose requirements, vary, or vary and cancel, permission in another, depending on the circumstances. The non-exhaustive examples provided below are therefore illustrative but not conclusive of which action the FCA will take in a given case.

EG 8.2 1Varying a firm’s Part 4A permission or imposing requirements on the FCA’s own initiative

EG 8.2.1

1When it considers how it should deal with a concern about a firm, the FCA will have regard to its statutory objectives and the range of regulatory tools that are available to it. It will also have regard to:

  1. (1)

    the responsibilities of a firm's management to deal with concerns about the firm or about the way its business is being or has been run; and

  2. (2)

    the principle that a restriction imposed on a firm should be proportionate to the objectives the FCA is seeking to achieve.

EG 8.2.2

1The FCA will proceed on the basis that a firm (together with its directors and senior management) is primarily responsible for ensuring the firm conducts its business in compliance with the Act, the Principles and other rules.

EG 8.2.3

1In the course of its supervision and monitoring of a firm or as part of an enforcement action, the FCA may make it clear that it expects the firm to take certain steps to meet regulatory requirements. In the vast majority of cases the FCA will seek to agree with a firm those steps the firm must take to address the FCA’s concerns. However, where the FCA considers it appropriate to do so, it will exercise its formal powers under sections 55J or 55L of the Act to vary a firm's permission or to impose a requirement to ensure such requirements are met. This may include where:

  1. (1)

    the FCA has serious concerns about a firm, or about the way its business is being or has been conducted;

  2. (2)

    the FCA is concerned that the consequences of a firm not taking the desired steps may be serious;

  3. (3)

    the imposition of a formal statutory requirement reflects the importance the FCA attaches to the need for the firm to address its concerns;

  4. (4)

    the imposition of a formal statutory requirement may assist the firm to take steps which would otherwise be difficult because of legal obligations owed to third parties.

EG 8.2.4

1 SUP 7 provides more information about the situations in which the FCA may decide to take formal action in the context of its supervision activities.

EG 8.2.5

1[deleted]

EG 8.2.6

1Examples of circumstances in which the FCA will consider varying a firm'sPart 4A permission because it has serious concerns about a firm, or about the way its business is being or has been conducted include where:

  1. (1)

    in relation to the grounds for exercising the power under section 55J(1)(a) or section 55L(2)(a) of the Act, the firm appears to be failing, or appears likely to fail, to satisfy the threshold conditions relating to one or more, or all, of its regulated activities, because for instance:

    1. (a)

      the firm's material and financial resources appear inappropriate for the scale or type of regulated activity it is carrying on, for example, where it has failed to take account of the need to manage risk professional indemnity insurance or where it is unable to meet its liabilities as they have fallen due; or

    2. (b)

      the firm appears not to be a fit and proper person to carry on a regulated activity because:

      1. (i)

        it has not conducted its business in compliance with high standards which may include putting itself at risk of being used for the purposes of financial crime or being otherwise involved in such crime;

      2. (ii)

        it has not been managed soundly and prudently and has not exercised due skill, care, and diligence in carrying on one or more, or all, of its regulated activities;

      3. (iii)

        it has breached requirements imposed on it by or under the Act (including the Principles and the rules), for example in respect of its disclosure or notification requirements, and the breaches are material in number or in individual seriousness;

    3. (c)

      the firm’s business model is not suited to its regulated activities, for example, where the firm’s business model is not compatible with its affairs being conducted in a sound and prudent manner;

    4. (d)

      the firm is not capable of effective supervision by the FCA, for example, where the way in which its business is organised or its membership of a group is likely to prevent effective supervision;

  2. (2)

    in relation to the grounds for exercising the power under section 55J(1)(c)(i) or section 55L(2)(c), it appears that the interests of consumers are at risk because the firm appears to have breached any of Principles 6 to 10 of the FCA’sPrinciples (see PRIN 2.1.1R) to such an extent that it is desirable that limitations, restrictions, or prohibitions are placed on the firm'sregulated activity.

EG 8.3 1Use of the own-initiative powers in urgent cases

EG 8.3.1

1The FCA may impose a variation of permission or a requirement so that it takes effect immediately or on a specified date if it reasonably considers it necessary for the variation or requirement to take effect immediately (or on the date specified), having regard to the ground on which it is exercising its own-initiative powers.

EG 8.3.2

1The FCA will consider exercising its own-initiative power as a matter of urgency where:

  1. (1)

    the information available to it indicates serious concerns about the firm or its business that need to be addressed immediately; and

  2. (2)

    circumstances indicate that it is appropriate to use statutory powers immediately to require and/or prohibit certain actions by the firm in order to ensure the firm addresses these concerns.

EG 8.3.3

1It is not possible to provide an exhaustive list of the situations that will give rise to such serious concerns, but they are likely to include one or more of the following characteristics:

  1. (1)

    information indicating significant loss, risk of loss or other adverse effects for consumers, where action is necessary to protect their interests;

  2. (2)

    information indicating that a firm's conduct has put it at risk of being used for the purposes of financial crime, or of being otherwise involved in crime;

  3. (3)

    evidence that the firm has submitted to the FCA inaccurate or misleading information so that the FCA becomes seriously concerned about the firm's ability to meet its regulatory obligations;

  4. (4)

    circumstances suggesting a serious problem within a firm or with a firm’scontrollers that calls into question the firm’s ability to continue to meet the threshold conditions.

EG 8.3.4

1The FCA will consider the full circumstances of each case when it decides whether an urgent variation of Part 4A permission or an imposition of a requirement is appropriate. The following is a non-exhaustive list of factors the FCA may consider.

  1. (1)

    The extent of any loss, or risk of loss, or other adverse effect on consumers. The more serious the loss or potential loss or other adverse effect, the more likely it is that the FCA’s urgent exercise of own-initiative powers will be appropriate, to protect the consumers' interests.

  2. (2)

    The extent to which customer assets appear to be at risk. Urgent exercise of the FCA’sown-initiative power may be appropriate where the information available to the FCA suggests that customer assets held by, or to the order of, the firm may be at risk.

  3. (3)

    The nature and extent of any false or inaccurate information provided by the firm. Whether false or inaccurate information warrants the FCA’s urgent exercise of its own-initiative powers will depend on matters such as:

    1. (a)

      the impact of the information on the FCA’s view of the firm's compliance with the regulatory requirements to which it is subject, the firm's suitability to conduct regulated activities, or the likelihood that the firm's business may be being used in connection with financial crime;

    2. (b)

      whether the information appears to have been provided in an attempt knowingly to mislead the FCA, rather than through inadvertence;

    3. (c)

      whether the matters to which false or inaccurate information relates indicate there is a risk to customer assets or to the other interests of the firm's actual or potential customers.

  4. (4)

    The seriousness of any suspected breach of the requirements of the legislation or the rules and the steps that need to be taken to correct that breach.

  5. (5)

    The financial resources of the firm. Serious concerns may arise where it appears the firm may be required to pay significant amounts of compensation to consumers. In those cases, the extent to which the firm has the financial resources to do so will affect the FCA’s decision about whether exercise of the FCA’sown-initiative powers is appropriate to preserve the firm's assets, in the interests of the consumers. The FCA will take account of any insurance cover held by the firm. It will also consider the likelihood of the firm's assets being dissipated without the FCA’s intervention, and whether the exercise of the FCA’s power to petition for the winding up of the firm is more appropriate than the use of its own-initiative powers (see chapter 13 of this guide).

  6. (6)

    The risk that the firm's business may be used or has been used to facilitate financial crime, including money laundering. The information available to the FCA, including information supplied by other law enforcement agencies, may suggest the firm is being used for, or is itself involved in, financial crime. Where this appears to be the case, and the firm appears to be failing to meet the threshold conditions or has put its customers' interests at risk, the FCA’s urgent use of its own-initiative powers may well be appropriate.

  7. (7)

    The risk that the firm's conduct or business presents to the financial system and to confidence in the financial system.

  8. (8)

    The firm’s conduct. The FCA will take into account:

    1. (a)

      whether the firm identified the issue (and if so whether this was by chance or as a result of the firm’s normal controls and monitoring);

    2. (b)

      whether the firm brought the issue promptly to the FCA’s attention;

    3. (c)

      the firm’s past history, management ethos and compliance culture;

    4. (d)

      steps that the firm has taken or is taking to address the issue.

  9. (9)

    The impact that use of the FCA’sown-initiative powers will have on the firm's business and on its customers. The FCA will take into account the (sometimes significant) impact that a variation of permission may have on a firm's business and on its customers' interests, including the effect of variation on the firm's reputation and on market confidence. The FCA will need to be satisfied that the impact of any use of the own-initiative power is likely to be proportionate to the concerns being addressed, in the context of the overall aim of achieving its statutory objectives.

EG 8.4 1Limitations and requirements that the FCA may impose when exercising its section 55J and 55L powers

EG 8.4.1

1When varying Part 4A permission at its own-initiative under its section 55J power (or section 55Q power), the FCA may include in the Part 4A permission as varied any limitation or restriction which it could have imposed if a fresh permission were being given in response to an application under section 55A of the Act.

EG 8.4.2

1Examples of the limitations that the FCA may impose when exercising its own-initiative variation power in support of its enforcement function include limitations on: the number, or category, of customers that a firm can deal with; the number of specified investments that a firm can deal in; and the activities of the firm so that they fall within specific regulatory regimes (for example, so that oil market participants,locals, corporate finance advisory firms and service providers are permitted only to carry on those types of activities).

EG 8.4.3

1Under its section 55L power (or section 55Q power), the FCA may, at any time and of its own initiative, impose on an authorised person such requirements as it considers appropriate.

EG 8.4.4

1Examples of requirements that the FCA may consider imposing when exercising its own-initiative power in support of its enforcement function are: a requirement not to take on new business; a requirement not to hold or control client money; a requirement not to trade in certain categories of specified investment; a requirement that prohibits the disposal of, or other dealing with, any of the firm’s assets (whether in the United Kingdom or elsewhere) or restricts those disposals or dealings; and a requirement that all or any of the firm’s assets, or all or any assets belonging to investors but held by the firm to its order, must be transferred to a trustee approved by the FCA.

EG 8.5 1Cancelling a firm’s Part 4A permission on its own initiative

EG 8.5.1

1The FCA will consider cancelling a firm'sPart 4A permission using its own-initiative powers contained in sections 55J and 55Q respectively of the Act in two main circumstances:

  1. (1)

    where the FCA has very serious concerns about a firm, or the way its business is or has been conducted;

  2. (2)

    where the firm'sregulated activities have come to an end and it has not applied for cancellation of its Part 4A permission.

EG 8.5.2

1The grounds on which the FCA may exercise its power to cancel an authorised person's permission under section 55J of the Act are the same as the grounds for variation and for imposition of requirements. They are set out in section 55J(1) and section 55L(2) and described in EG 8.1.1. Examples of the types of circumstances in which the FCA may cancel a firm'sPart 4A permission include:

  1. (1)

    non-compliance with a Financial Ombudsman Service award against the firm;

  2. (2)

    material non-disclosure in an application for authorisation or approval or material non-notification after authorisation or approval has been granted. The information which is the subject of the non-disclosure or non-notification may also be grounds for cancellation;

  3. (3)

    failure to have or maintain adequate financial resources, or a failure to comply with regulatory capital requirements;

  4. (4)

    non-submission of, or provision of false information in, regulatory returns, or repeated failure to submit such returns in a timely fashion;

  5. (5)

    non-payment of FCA fees or repeated failure to pay FCA fees except under threat of enforcement action; and

  6. (6)

    failure to provide the FCA with valid contact details or failure to maintain the details provided, such that the FCA is unable to communicate with the firm;

  7. (7)

    repeated failures to comply with rules or requirements;

  8. (8)

    a failure to co-operate with the FCA which is of sufficient seriousness that the FCA ceases to be satisfied that the firm is fit and proper, for example failing without reasonable excuse to:

    1. (a)

      comply with the material terms of a formal agreement made with the FCA to conclude or avoid disciplinary or other enforcement action; or

    2. (b)

      provide material information or take remedial action reasonably required by the FCA.

Sections 55J(6) and 55K of the Act sets out further grounds on which the FCA may cancel the permission of authorised persons which are investment firms and section 55J(6A) of the Act set out further grounds on which the FCA may cancel the permission of authorised persons who are full-scope UK AIFMs.

EG 8.5.3

1Depending on the circumstances, the FCA may need to consider whether it should first use its own-initiative powers to impose requirements on a firm or to vary a firm'sPart 4A permission before going on to cancel it. Amongst other circumstances, the FCA may use this power where it considers it needs to take immediate action against a firm because of the urgency and seriousness of the situation.

EG 8.5.4

1Where the situation appears so urgent and serious that the firm should immediately cease to carry on all regulated activities, the FCA may first vary the firm'sPart 4A permission so that there is no longer any regulated activity for which the firm has a Part 4A permission. If it does this, the FCA will then have a duty to cancel the firm'sPart 4A permission - once it is satisfied that it is no longer necessary to keep the Part 4A permission in force.

EG 8.5.5

1However, where the FCA has cancelled a firm'sPart 4A permission, it is required by section 33 of the Act to go on to give a direction withdrawing the firm'sauthorisation. Accordingly, the FCA may decide to keep a firm'sPart 4A permission in force to maintain the firm's status as an authorised person and enable it (the FCA) to monitor the firm's activities. An example is where the FCA needs to supervise an orderly winding down of the firm's regulated business (see SUP 6.4.22 (When will the relevant regulator grant an application for cancellation of permission)). Alternatively, the FCA may decide to keep a firm'sPart 4A permission in force to maintain the firm's status as an authorised person to use administrative enforcement powers against the firm.

EG 8.6 3Exercising the power under section 55Q to vary or cancel a firm’s Part 4A permission or to impose requirements on a firm in support of an overseas regulator: the FCA’s policy

EG 8.6.1

3The FCA has a power under section 55Q to vary, or alternatively cancel, a firm’sPart 4A permission, or to impose requirements on a firm, in support of an overseas regulator. Section 55Q(4), (5) and (6) set out matters the FCA may, or must, take into account when it considers whether to exercise these powers. The circumstances in which the FCA may consider varying a firm’sPart 4A permission or imposing requirements in support of an overseas regulator depend on whether the FCA is required to consider exercising the power in order to comply with a Community obligation. This reflects the fact that under section 55Q, if a relevant overseas regulator acting under prescribed provisions has made a request to the FCA for the exercise of its own-initiative power to vary or cancel a Part 4A permission or to impose requirements, the FCA must consider whether it must exercise the power in order to comply with a Community obligation.

EG 8.6.2

3Relevant Community obligations which the FCA may need to consider include those under the Capital Requirements Directive, the Solvency II Directive1, the Investment Services Directive/Markets in Financial Instruments Directive,2 the Insurance Mediation Directive and the Market Abuse Regulation2. Each of these legislative acts2 imposes general obligations on the relevant EEAcompetent authority to cooperate and collaborate closely in discharging their functions under the legislative acts2 .

EG 8.6.3

3The FCA views this cooperation and collaboration as essential to effective regulation of the international market in financial services. It will therefore exercise its own-initiative powers wherever:

  1. (1)

    an EEACompetent authority requests it to do so; and

  2. (2)

    it is satisfied that the use of the power is appropriate (having regard to the considerations set out at paragraphs 8.2.1 to 8.2.6) to enforce effectively the regulatory requirements imposed under the Single Market Directives or other Community obligations.

EG 8.6.4

3The FCA will actively consider any other requests for assistance from relevant overseas regulators (that is requests in relation to which it is not obliged to act under a Community obligation). Section 55Q, which sets out matters the FCA may take into account when it decides whether to vary or cancel a firm’sPart 4A permission or to impose requirements on a firm in support of the overseas regulator, applies in these circumstances.

EG 8.6.5

3Where section 55Q(5) applies and the FCA is considering whether to vary a firm'sPart 4A permission or to impose requirements on a firm, it may take account of all the factors described in paragraphs 8.6.1 to 8.6.8 but may give particular weight to:

  1. (1)

    the matters set out in paragraphs (c) and (d) of section 55Q(5) (seriousness, importance to persons in the United Kingdom, and the public interest); and

  2. (2)

    any specific request made to it by the overseas regulator to impose requirements or to vary, rather than cancel, the firm'sPart 4A permission.

EG 8.6.6

3The FCA will give careful consideration to whether the relevant authority's concerns would provide grounds for the FCA to exercise its own-initiative powers to vary, impose requirements or cancel if they related to a UK firm. It is not necessary for the FCA to be satisfied that the overseas provisions being enforced mirror precisely those which apply to UK firms. However, the FCA will not assist in the enforcement of regulatory requirements or other provisions that appear to extend significantly beyond the purposes of UKregulatory provisions.

EG 8.6.7

3Similarly, the FCA will not need to be satisfied that precisely the same assistance would be provided to the United Kingdom in precisely the same situation. However, it will wish to be confident that the relevant authorities in the jurisdiction concerned would have powers available to them to provide broadly similar assistance in aid of UK authorities, and would be willing properly to consider exercising those powers. The FCA may decide, under section 55Q(6), not to exercise its own-initiative powers to vary or cancel in response to a request unless the regulator concerned undertakes to make whatever contribution towards the cost of its exercise the FCA considers appropriate.

EG 8.6.8

3Paragraphs 8.4.2 and 8.4.4 set out some examples of limitations and requirements the FCA may impose when exercising its section 55Q powers.

EG 8.7 1The FCA’s policy on exercising its power of intervention against incoming firms under section 196 of the Act

EG 8.7.1

1The FCA adopts a similar approach to the exercise of its power of intervention under section 196 as it does to its own-initiative powers to vary Part 4A permission or impose requirements, but with suitable modification for the differences in the statutory grounds for exercising the powers. Consequently the factors and considerations set out in paragraphs 8.2.1 to 8.4.4 and 8.6.1 to 8.6.8 may also be relevant when the FCA is considering regulatory concerns about incoming firms.

EG 8.7.2

1When it is considering action against an incoming firm, the FCA will co-operate with the firm'sHome State regulator as appropriate, including notifying and informing the firm'sHome State regulator as required by the relevant section of the Act.

EG 8.8 Other relevant powers

Removal of directors and senior executives and appointment of temporary managers

EG 8.8.1

1The Bank Recovery and Resolution Order 2016 amended the Act by adding sections 71B to 71I. The FCA has powers to remove directors and senior executives and to appoint temporary managers of relevant firms or parent undertakings, as defined by section 71I of the Act. Where a temporary manager has been appointed, the FCA also has powers to require the directors not to exercise specified functions during the period of appointment and to consult the temporary manager, or obtain the consent of the temporary manager, before taking specified decisions or specified action. The FCA will exercise these powers in accordance with the conditions and procedures set out in the relevant sections of the Act.