You may recall that when you initially applied for regulatory authorisation, you agreed to ensure that your firm would meet each of the five Threshold Conditions at all times.
The FCA will expect this (COND Sourcebook) and it is a continuing requirement of your authorisation to do so. Failure to meet any of the Threshold Conditions will mean that you are in breach of FCA rules. Any breach must be recorded in your breaches register and the management must consider if they need to report this to the FCA under Principle Eleven, “Being open and honest.”
As a reminder, the current five conditions (with a note of which section of the Sourcebook applies) are as follows:
- COND 2.2 Location of Offices
- COND 2.3 Effective Supervision
- COND 2.4 Appropriate Resources
- COND 2.5 Suitability
- COND 2.7 Business Model
There is a lot of focus on 2.4, Appropriate Resources. There are essentially two parts to this, financial resources and non-financial resources.
Much of the focus can be on the financial aspect, which of course is critical to the running of a successful business. As a result, the non-financial aspect occasionally lags behind, so it is worth spending a few moments to consider non-financial resources.
The FCA will want to see that you are able to demonstrate that you have sufficient personnel to run the business effectively, which links in with the last condition, that relating to the Business Model.
Sufficient personnel are not only essential for a successful firm, but also for the sustainability and viability for the years ahead, so that you can continue to deliver a high quality, compliant service to your customers and continue to treat them fairly.
This requirement will cut across all sectors of the business, including broking, HR, compliance, training, office support, and of course, management.
The FCA will want to see that you can demonstrate that you have enough resource to monitor all these areas effectively and that the resource is sufficient to maintain effective management and governance.
Resources will vary greatly depending on the business model, the markets traded in, the size and geographic spread of the business, and its offices, amongst other factors.
The FCA takes a much more intrusive stance on this matter than the FSA did, who largely accepted that matters were in order without specific enquiry (unless given cause to enquire).
Whilst in practice, meeting these measures may well happen without any significant intervention from a firm, you do need to have some form of regular review mechanism to demonstrate high-level engagement.
A template document is available in the ‘Template’ section of the AVIVA Development Zone for Compliance Club members.
The Regulator will want to see evidence of your reviews and why you believe that the resource is sufficient. It is, therefore, important that you can have a document to demonstrate your review activity, which should be updated at least annually for a smaller firm. Larger firms may well have a more periodic review depending on their size, etc.
Of course, there may be times when the resource is not sufficient, but these can be seen as temporary. For example, summer holidays, Christmas, or an unexpected resignation of a staff member. All these put a strain on the business and its resources, but they are temporary, and workloads are temporarily managed until the full complement is restored.
What the FCA do not want to see is such temporary spikes becoming a norm and a firm struggling to meet its customer and regulatory commitments.
There are other elements of the non-financial resource such as suitability of offices, equipment and so on, but we will look at these in a later article.
There may be some elements that are covered elsewhere in other documents such as a Business Plan, in which case some cross-referencing will suffice in the review document.
Should you wish to discuss this or have any questions, please speak to your RWA Business Manager.