Regulatory Hosting
What is regulatory hosting
Financial Services firms in most jurisdictions around the world are subject to oversight by the local regulator, in other words a registration or a license needs to be obtained before any regulated activity can be performed, such as deposit taking, financial advice or sales. In Europe as well as in the UK, firms have the option to outsource this function to a third party, by becoming an Appointed Representative in the UK or a Tied Agent in Europe of an already regulated firm, the applicant effectively “rents” the license without having to apply for one directly. This approach has many benefits which helped it gain a lot of popularity and become known as Regulatory Hosting.
Regulatory Hosting vs Direct License pros and cons
Cost efficiency
Outsourcing authorisation is significantly more cost efficient than the application for and maintenance of a direct license.
Direct authorisation carries with it a number of upfront as well as running costs which can be significant. Items such as service provider fees – incorporation, audit, legal, banking etc., application fees paid directly to regulator as well as capital adequacy requirements, extra staff hire and integration all of this can quickly add up. In contrast getting regulated via a third party only requires payment of onboarding fees to the service provider and an application fee to the regulator. In general Regulatory Hosting costs can be as little as 10% or even less of the cost of the full license.
Application Time
It takes a lot more time to obtain a direct license rather than obtain authorisation via a Regulatory Hosting Provider.
Because the regulator needs to run extensive checks on the candidate during a direct license application, it can take significantly longer to process than becoming authorised via Regulatory Host. In addition, regulators in UK and across the EU, especially since COVID pandemic, have been experiencing severe bottlenecks which affected already lengthy processing times for direct applications. We have seen times as long as two years for direct application in EU and as lite as three weeks via Regulatory Host.
Complexity
The application process for a direct license is a lot more complicated.
Due to the highly regulated nature of the financial services industry, each new license application is subject to expensive checks by the regulator. Each person to be authorised is thoroughly checked including criminal as well as financial records. In addition, core staff to be included as a minimum requirement are also checked for competency and suitability. Finally, the company itself is looked at – everything from the business plan to banking, legal and internal and external audit arrangements are scrutinized. Needless to say, this takes time and resources from the candidate firm.
In contrast when applying indirectly, it’s the license holding firm that is responsible for supervision and therefore the checks required by the regulator are significantly less onerous. There is of course a matter of the license holder doing their own KYC, but in most cases such process is nowhere near the level of complexity of direct application.
Infrastructure
Direct license application carries with it certain requirements that neccesitate, in most cases, significant additions to existing infrastructure of the applicant.
In order to qualify for a direct license a candidate firm needs to comply with a set of requirements. Local residency is a must as well as a number of key positions in the firm – qualified compliance officer, internal auditor, advisory board, locally based directors etc. In addition, a number of service providers need to be engaged, such as an audit firm, legal and tax advisory. Some regulators also require persons to be authorised to obtain local qualifications, for instance CySEC exam certification in Cyprus, which requires a minimum of 100 hours of study for a candidate with solid prior knowledge of compliance framework.
Indirect regulation avoids most of those complexities. The only exception is the “local presence” for EU/MIFID authorisation, which means local entity and one local director. Although less convenient than an FCA Appointed Representative solution, it is nonetheless significantly less demanding than a direct application under either legal framework.
Flexibility
With all the benefits of the Appointed Representative/Tied Agent regime it is easy to see why most firms choose this solution, however in some cases getting directly authorised might be more appropriate. For instance, an internal license mean a firm no longer depends on a third party to maintain its status with the regulator. When authorised indirectly, if the Regulatory Host suffers any business continuity issues, this will affect the licensee and is out of control of the licensee. Similarly, direct authorisation means the firm does not have to share the license with other unknown entities (other licensees of a Regulatory Host). If one of those licensees gets in trouble for malpractice this can affect the whole structure. Finally, if a firm wishes to expand the scope of its services – for instance from financial advice to holding client money, this requires an “upgrade” of the license. If the Regulatory Host does not have the required permissions, the licensee might be stuck on “lower tier” license as convincing Regulatory Host to upgrade its license because of one client is not always an option. Internal decision to upgrade a license is much easier to make and implement.
The above points can be very important and are worth being aware of when making a decision. However, in most cases Appointed Representative in the UK and a Tied Agent status in Europe is a more efficient and preferred way to get regulated.
Why we are doing this?
Before Brexit there was an equivalency regime in place between UK and the rest of Europe, in other words if a firm is authorised in Europe, it was deemed to also be authorised in the UK and vice versa. Due to the UK’s relative simplicity of becoming regulated, either directly or by proxy, most firms (UK based and beyond) that wanted to promote their products in UK and Europe chose to get regulated in UK and gain access to two marketplaces with one license. With UK out of the European Union, equivalency regime no longer applied, and firms now require separate authorisation for each jurisdiction – one for UK and one for EU.
This problem was made worse by the fact that getting regulated in Europe, whether directly or via outsourcing, is a much more complex and expensive undertaking compared to the UK. Increased capital requirements, operational presence in a European country, long delays in approvals, and a dearth of suitable talent has resulted in major hurdles for EU promotion.
The above combination of hard to implement EU regulatory solution with ever more increasing complexities of UK authorisation has created a challenge which Arion has set out to meet and offer our clients a solution that takes away the complexity of authorisation while at the same time delivers on the end objective – authorisation for promotional activities within UK and EU.
