Additional business line approvals take twice as long under FCA scrutiny

The Financial Conduct Authority (FCA) is taking nearly twice as long to authorise an additional business line to a financial services business, according to lawyers.

City law firm RPC says the 85 per cent increase in time taken by the FCA for the approvals is most likely as a result of greater regulatory scrutiny on firms' business plans and resourcing.

A financial service business wanting to expand into a different business line must apply to the FCA for a 'variation of permission' (VoP), which allows it to engage in new regulated activities.

Lawyers at RPC say that in 2007, under the Financial Services Authority, approvals took approximately a month, but the current regulatory regime is far more stringent.

While the FCA is keen to prevent failures by applying stricter regulatory controls, businesses are finding compliance increasingly burdensome.

Richard Burger, a partner at RPC, remarked that FCA delays are having a detrimental effect on competition in the financial services sector.

'If new permissions are being sought by established firms with experienced, approved managers, it is hard to see why new permissions should take so long,' he said. 'Many of the applicants are smaller lenders, or innovative consumer finance providers. At a time when it is widely recognised that new sources of financing for SMEs and consumers are a priority for the UK economy, the timeframes for approval are important.'

Burger continued: 'Starting in new business lines carries an inherent risk, which is a positive thing for the long term health of the market. This cannot be entirely regulated away. When the costs of obtaining permissions begin to become prohibitive consumer choice is likely to be damaged.'

RPC explained that there is a 'natural tension' between a firm's need to trade and the desire of the FCA to curb failures in firms. The major fault lines tend to relate to how much excess capital the FCA wants assigned to the new business line and the number of staff that new lines should have.

Where firms choose to set up new service line companies through subsidiaries, the FCA tends to demand high levels of capitalisation to insulate customers against potential losses. RPC highlighted that this can undermine the businesses return on capital making new ventures less profitable.

Another area of friction with the regulator is the higher number of operational and compliance staff required in order to meet the regulator's expectations - with obvious cost implications for the business.