FCA Threshold Conditions: Explained

If you’re applying for Financial Conduct Authority (FCA) authorisation, understanding the FCA Threshold Conditions is crucial. Similarly, if you are already authorised and regulated by the FCA, maintaining the FCA Threshold Conditions at all times is just as important. 

What Are The FCA Threshold Conditions? 

The FCA Threshold Conditions are the minimum requirements that you must meet to become, and remain, authorised by the Financial Conduct Authority. They are set out in the FCA Handbook under COND 2. There are five threshold conditions:

1. Location of Offices (COND 2.2)

The key components to compliance with this requirement are that: 

• Essentially, your firm must maintain a physical presence in the UK, such as a Head Office; and 
• The key decision makers must also be based in the UK.

The key decision makers are often referred to as the ‘mind and management’ of the firm. Those who are making the executive decisions of the firm including strategic decisions about the firm’s overall direction and day-to-day operations. 

Depending on the size and complexity of your firm, it can also include the location of central administrative functions for example compliance oversight and internal audit. 

If your firm is based outside the UK, you must still evidence presence in the UK.  In practice, this often means incorporating a company in the UK and making key UK based hires. 

Can you have a remote/hybrid model? 

Interestingly, during the COVID 19 pandemic, the FCA did allow some flexibility in its approach to remote and hybrid working. The FCA assesses this on a case-by-case basis and you should still evidence how you meet the threshold conditions. 

Location of offices compliance checklist: 

• Physical presence in the UK e.g. via Head Office.  
• ‘Mind and Management’ of directors/senior management based in the UK.
• If you have a remote working plan, ensure risks are assessed, mitigated and all evidenced in writing.
• If your firm is part of a group or has close links with other entities, do these relationships affect your ability to meet the FCA’s location requirements?

2. Effective Supervision (COND 2.3)

The FCA must be able to supervise your firm effectively. 

Effective supervision is related to the first requirement under COND 2.2, requiring the ‘mind and management’ to be in the UK, so that the FCA can have access to the people running the regulated business as well as access to premises, information, record and policies in an open and transparent way. 

Manage group and close links effectively

If you are part of a group or have close links with other entities, you must ensure that these relationships do not hinder the FCA’s ability to supervise you. This may involve:

• Sharing information with the FCA about your group structure and relationships.
• Addressing conflicts of interest or other issues that could impact effective supervision.

Effective supervision checklist: 

• Can you evidence how the FCA will have access to staff and premises? 
• If key hires are working remotely in the UK, for example at home: Do they realise that this could mean home visits from the FCA?
• Can you show a clear ownership structure? 
• Can you show independence from sister/parent entities, so that close links do not affect the FCA’s ability to supervise you? 
• Unless your regulated and unregulated activity are related e.g. secondary credit broking, can you justify why they should be together and how the FCA can still effectively supervise you?

3. Appropriate Resources (COND 2.4)

Your firm must have sufficient financial and non-financial resources to operate sustainably and meet its regulatory obligations. This includes having skilled staff, robust IT systems, and adequate capital. This is part of the requirement of being “ready, willing, and organised” to comply with FCA rules and ready for authorisation. 

Financial: 

• You must have enough money to meet your obligations and manage risks.
• For certain activities, there are very specific rules on a minimum capital requirement that must be held at all times. 
• The FCA is increasingly requesting firms to provide robust Wind-Down Plans. These plans must demonstrate that, if the business needs to wind down, it can do so in an orderly manner and with sufficient resources to manage the process effectively. 
• If you’re part of a group, the FCA will also consider the financial resources of the group.

Non-Financial: 

This means you must employ enough resources including: 

• Staff with knowledge, skills and experience. The FCA will likely have calls or interviews with key hires. Key staff should ensure they are prepared for this. 
• Robust systems to manage your business, e.g. IT infrastructure. Etc 
• Policies and Procedures to ensure to comply with FCA rules, and protect your customers. 

Appropriateness of resources: 

The FCA will assess whether your resources are suitable based on the nature, scale, and risks of your business, as well as your membership in a group (if applicable).

Appropriate resources checklist: 

• Can you evidence sufficient capital to run your business, including room for growth?
• Employ enough staff who are adequately skilled and knowledgeable? 
• Have systems and processes in place for authorisation?

4. Suitability (COND 2.5)

The FCA will assess whether your firm, including its owners, and the individuals running the business have the required probity and are ‘fit and proper’. 

This means, the firm and those running the business will need to undertake checks, for example, a DBS check for the governing body and make declarations relating to criminal, civil, regulatory and business dealings. 

As part of suitability, the FCA will also assess whether the governing body has the skills and experience to understand, operate and manage the firm’s regulated activities. Therefore relevant industry experience, and sometimes qualifications are important in evidencing this. 

Suitability checklist: 

• Undertaken fit and proper checks for governing body, including skills and experience assessment. 
• Assess risks related to close links, and any issues of probity.
• Ensure you are open and cooperative about any declarations. 

5. Business model  (COND 2.6)

The FCA requires you to have a suitable business model that aligns with your regulated activities. The FCA will assess the business model against its own primary objectives.

Some practical aspects to consider: 

• Review of outsource providers and whether they are suitable. 
• If the business has an unregulated aspect: to what extent does this impact the regulated aspect of the business. The FCA will look at whether it can still effectively supervise the business, or whether the unregulated aspect impedes this, for instance if it is totally unrelated and could be separated. 
• Related to this, is also ‘contagion risk’: the risk associated with the unregulated aspect being spread to the regulated side of the business. 

Business model checklist: 

• Does your business model prioritise fair treatment of customers? Is this evidenced? 
• Does your model support the stability and integrity of the UK financial system?
• Is your business model resilient to risks, including economic changes and operational challenges?
• Has a risk assessment of unregulated business been undertaken? 

When Does The FCA Assess The Threshold Conditions? 

The FCA will assess whether you meet the threshold conditions at authorisation, but can also assess or review them: 

• During a Variation of Permission. For example, if you are thinking of adding, amending or reducing your permissions.
• Sup 11 notifications: The FCA requires ‘open and cooperative’ communication as part of Principle 11. Due to the wording of Principle 11 being very broad, it means any number of updates could require an FCA notification. Along with this, you may see additional questions and queries from the FCA regarding your business. So, again, it is always prudent to ensure compliance.  
• Change in Control Application: I.e. when you are changing all or part of the firm’s ownership structure that triggers a Change in Control application. 
• Public awareness: If any aspect of your business or industry peaks the FCA’s interest this may open further questions about your business. 
• Or during review work specific to your firm. 

It’s important to note that as an authorised firm you must meet the FCA Threshold Conditions at all times. 

What Happens If You Can’t Satisfy The FCA Threshold Conditions? 

If your firm is failing to meet, or at risk of failing to meet the FCA Threshold Conditions, then this can result in: 

• Your application being rejected if it is applying for authorisation; 
• Enforcement action such as fines; 
• Restrictions, or new requirements to follow; or 
• The removal of your authorisation.

These powers are explained in more detail in other parts of the FCA Handbook (SUP 7 and EG 8).

Examples Of Firms Failing The FCA Threshold Conditions

1. Final Notice, Reed Motors Ltd

• The firm failed to satisfy the suitability and appropriate resources threshold conditions. 
• Its sole director and approved person, Mr Harris, failed to disclose a criminal conviction. 
• End result: Cancellation of authorisation. 

2. Final Notice: Platinum Motor Company Limited

• The firm failed to satisfy the appropriate resources and suitability threshold conditions. 
• The firm was authorised in August 2019, but by September 2020, the firm’s sole approved person ceased to hold any senior management function. 
• The firm failed to submit a replacement, despite the FCA’s repeated requests. 
• End result: Cancellation of authorisation. 

Ready To Apply For FCA Authorisation?

We can guide you through the whole process, providing templates, developing the required application documents, and helping to answer FCA questions. 

Read our other blogs on how to get authorised as a Credit Broker or a Motor Dealer; or

Contact Us for a free chat regarding the FCA Authorisation process.