Top ten tips for navigating financial services licensing
Although the process of obtaining a financial services licence may seem intimidating, it need not be. Below, we present some guidelines to consider as you prepare for regulatory licensing.
- Applicant: In the majority of cases, the applicant for a regulatory licence will be a corporate entity. With this in mind it is important to consider whether there already is an entity that will serve as the applicant or whether a new one should be incorporated. In some instances, where there is an existing entity and it was conducting legacy business, that business may need to be segregated from the proposed regulated business. More often than not, it is recommended that a new entity be established for the regulated business. Corporate service providers can assist with setting up the entity.
- Service providers: In addition to corporate service providers, the applicant may require specific specialised service providers based on the applicable regulatory framework. These could encompass a variety of roles, including resident directors, non-executive directors, authorised agents, authorised representatives, principal offices, auditors, legal advisors, compliance officers, money laundering reporting officers, and deputy money laundering reporting officers, depending on the specific regulatory requirements invoked.
- Location and infrastructure: Very early on, the senior management will need to consider where the business will be established, will it be onshore or offshore or being done cross border. This is important as the applicant will need to determine the physical premises / infrastructure of the business and all of the services, utilities and staffing that go along with setting up regulated businesses.
- Capitalisation: Various regulatory regimes will require the applicant to be sufficiently capitalised. In most instances, the regulatory capital will need to match the size, nature, complexity, diversity and risk appetite of the applicant. The regulatory capital will also need to be reflected on the balance sheet of the applicant at all times. Though it can be used as working capital. The capital can take the form of a cash injection, loan, gift, etc.
- Professional indemnity: Insurance requirements are important to any regulated business. Involving an insurance service provider early in the licensing process is useful in order for them to get an understanding of the proposed business and set out to source suitable insurance coverage for the applicant in the market.
- Auditor services: Typically, applicants are required to undergo an audit conducted by an accredited auditor. The selected auditor must be affiliated with a recognised professional auditing organization and satisfy all the necessary "fit and proper" criteria for approval. Additionally, the auditor should possess a comprehensive understanding of the applicant's business, in the area they will be auditing, along with relevant industry expertise. It is also essential that the auditor maintains their own insurance coverage.
- Document collation: The majority of these documents relate to due diligence regarding the management, history and ownership of the applicant. It is crucial for the applicant to ensure that these documents are not only suitable for their intended purpose but also well-prepared. Thorough preparation is essential to enable the regulatory authority to gain a comprehensive understanding of the individuals who will be overseeing and holding ownership stakes in the applicant's operations.
Possessing a well-organised set of due diligence documents can expedite the application process and reduce the need for extensive correspondence with the regulator. In addition to the due diligence documents, there will be a multitude of other documents, such as policy and procedure documents, business plans, financial records, commitments and undertakings, contracts, and arrangements. Collaborating closely with appointed legal counsel is advisable, to ensure that all these documents are appropriately included in the licensing application package.
It is worth noting that preparing and reviewing these documents can be time-consuming. Therefore, initiating this process early is imperative, especially if the applicant has a specific deadline in mind for commencing regulated business activities.
- Time: Throughout the licensing procedure, it is crucial to stay actively involved with the regulatory authority and diligently prepare and submit responses within the specified deadlines. This proactive approach is essential for keeping the licensing application on schedule and preventing unnecessary delays. In cases where service providers are tasked with providing supplementary documents, they should be committed to producing them within a predetermined timeframe.
- Approval and conditions: Once the regulatory authority has obtained all the required documents and completed their evaluation, granting approval for the application becomes possible. At this stage, two scenarios may unfold:
- An approval in principle letter can be issued, accompanied by specific conditions. These conditions may necessitate that the applicant submits final documents, such as evidence of deposited regulatory capital, the completion of professional indemnity insurance, and the provision of fully executed copies of leases and other service provider contracts.
- Alternatively, the regulatory authority may issue the licence but impose reporting conditions that must be adhered to once the applicant commences its business operations. It is advisable for the applicant to diligently adhere to these reporting conditions and incorporate them into their regulatory schedule. This proactive approach helps prevent missed deadlines, which could result in regulatory enforcement actions.
- Always check with legal counsel: Legal counsel plays an essential and indispensable role in the successful execution of any licensing application. The applicant should maintain an ongoing and collaborative relationship with their legal counsel, both during and after the licensing process. In situations where uncertainties arise or when the applicant contemplates specific actions, seeking guidance from legal counsel before proceeding is highly recommended. Effectively, legal counsel serves as a gatekeeper, helping to prevent potential breaches and ensuring compliance with regulatory requirements.
We trust that you find this information beneficial. If you have any inquiries or require assistance, please do not hesitate to reach out to us.