One simple step to becoming FCA regulated

In this article I will be sharing one thing you can do right now to become an FCA regulated money manager. 

By being FCA regulated you will add enormous credibility to your business and earn the trust of your potential investors. This will help you to grow your AUM much faster. 

Throughout this article we will be looking at two main topics: 

• The costs involved for direct FCA regulation 
• Utilising a specialist regulatory hosting provider 

The perception that many start up fund managers have of regulation is that it is extremely expensive to acquire and maintain. 

In today’s climate it is almost always a legal obligation if you are managing or even advising on client investments. 

If you are managing client funds in any form without regulation you are at serious risk of legal action being taken against you. 

In 2017, the FCA conducted a detailed study into the asset management business in the UK. Its conclusions pointed to even more scrutiny and tighter restrictions to follow. 

While the specific details of regulation differ around the world it is highly likely that you will need it in some form. 

During my career I have been mainly based in the UK and the FCA are the regulator that my business has fallen under. 

I have colleagues that operate around the world and so have some insight into becoming regulated in places such as the US too. 

 The initial costs of becoming directly regulated 

One of the major hurdles that new start up managers and small funds face is the cost of being a regulated entity. 

These costs are generally broken down into three areas. The first area is that of initial set up. Next there is the cost of capitalisation. Finally, the cost of compliance must be covered. 

This is an important consideration ahead of time because these costs can mount up considerably in a short space of time. 

The initial costs include the fee payable to the FCA for the application.  

According to the FCA, in 2018, this was between ￡5,000 GBP up to ￡15,000 GBP depending on the nature of the business. 

You will also need to hire a consultant to guide you through the application process. If you make a mistake with the application the application fee is non-refundable. 

Consultant fees vary wildly depending on the type of business they are targeting. Small start-ups in 2018 expected to pay a minimum of ￡5,000 GBP which can potentially rise all the way to ￡20,000. 

Despite the consultant working with you to ensure the application is processed correctly you will be required to do most of the work. 

This is a cost of time and energy more than money but if you have people working for you then this is also a cost to factor. 

The average time for an asset management license to be granted in the UK is around 9 months.  

This can vary depending on the exact permissions required with applications often taking as long as 12 months. 

A prudent budget for the initial application period would be around ￡30,000 GBP and 9 months of processing time. 

Cost of capitalisation and compliance 

Capitalisation is the term used to describe a reserve of money that a company holds. The purpose of a reserve is to cover costs in the event that the company fails. 

The terms of capital adequacy requirements are laid out in the FCA handbook. For a standard asset management business in the UK the reserve requirement is around ￡125,000 GBP. 

All firms are required to have this amount on hand as a minimum at all times. This can consume a significant amount of capital for a small money manager. 

Once regulated, the firm must then ensure that it is fully compliant with the regulations at all times. This requires the efforts of a specialised compliance officer. 

A compliance officer is responsible for making sure that you adhere to the rules and that your business conducts itself appropriately. 

According to payscale.com the average salary for a London based regulatory compliance officer in 2017 was just over ￡50,000 per year. 

When you combine all of the costs together, the total first year outlay to become regulated in the UK is over ￡200,000 GBP. 

This is without the added expense of running the actual business on a day to day basis. 

This is a significant hurdle to overcome for most small asset managers and traders. It is the kind of number that deters so many traders from ever growing their new business. 

But if regulation is a legal requirement and the cost is so high what is the solution for small managers that are trying to grow? 

Specialist regulatory hosting providers 

In 2011, I was running my first managed account programme. The FCA were tightening their regulations and my broker informed me that I would need to become regulated.  

My business was only small and getting directly regulated was out of the question based on my size and the funds I had available. 

My broker introduced me to the concept of hosted regulation to solve my dilemma. I would work underneath a regulated firm and would fall under their regulation. 

I would pay the firm a fee for this that was much lower than getting regulated directly.  

This was a pivotal moment in my early career and allowed me to continue building and growing my new business. 

I have changed hosting providers several times over the years. I remained under a hosting agreement because it was efficient and cost effective. 

There are many firms offering hosting and the fees range significantly. There are also firms that seem to offer hosting but in reality do not. 

As a new trader it is important to be very careful about which type of firm you start working with. A bad reputation can quickly spread and no one wants to be caught inside a regulatory investigation. 

Correct hosting will always result in you or your company being named on the FCA register. You will be assigned your own registration number by the FCA. 

Any hosting that tries to structure things without you being maintained on the register is not hosting at all.  

Some firms will call it ‘consulting’ and state that they are the regulated entity and you merely act as a consultant giving them trading ideas. 

As the regulated entity they will then make the final call on whether to trade those ideas.  

This means that all of your clients are, in fact, their clients and they have the freedom to do whatever they see fit. 

This is a grey area at best. The costs of such an arrangement may be cheaper but it is best to avoid such a scenario. 

How legitimate hosting works 

The basic premise of hosting is that you become a representative of the firm you are working with. In fact, the exact term is ‘Authorised Representative’. 

This means that you are authorised to trade your strategy however you see fit while maintaining compliance to the regulations. 

You will be required to upkeep your regulatory understanding and competence. The firm you work under will also be fully responsible for your actions. 

Because of this responsibility all of the compliance will run through the firm itself rather than you handling it independently. 

In practice, this means that any material that is on public display must first be agreed by their internal compliance officer(s). 

The restrictions on what you can and cannot say or display are extremely stringent. I remember when I was advised to change a logo I was using because it looked too ‘positive’ in nature. 

This was particularly tricky when trying to advertise performance to possible clients.  

Rather than publicly display it, I was first required to ensure that the person was a professional client and not a retail individual. 

All marketing brochures and fact sheets will be inspected in minute detail, line by line. Anything that could even be interpreted as misleading in anyway must be clarified or removed. 

A legitimate hosting provider will take an active interest in everything you are saying and doing in your business. They will constantly support you in your compliance obligations. 

If you’re running a fund structure they will also be in close communication with your administrator. This ensures that your trading activity is being monitored well too. 

Cost of hosting 

The cost of legitimate hosting can range but in 2018 the average cost was around ￡3,000 per month.  

Some providers will allow you to pay this monthly while others may require you to pay it quarterly in advance. 

This may sound expensive but when compared to the cost of direct regulation it really is a great deal. A good hosting provider will want to assess your suitability before taking you on. 

After you have agreed to work together you should be on the FCA register in just a few weeks. This route not only saves hundreds of thousands of Pounds but also months in time. 

The hosting fee covers everything from initial set up all the way through to ongoing compliance. There are also several other valuable things you receive. 

The biggest of these is access to a fresh new network of contacts. Chances are that the hosting provider has several other funds under their authorisation. 

This means that they have probably already discovered the various things you might be trying to find. 

For example, you might be looking for a good lawyer to draw up your offering documents.  

It could be an administrator you need. Perhaps you are looking for credible IBs that can help you find investors. 

The list of possibilities is endless and working with a hosting firm will open up a whole new world of contacts for you to utilise and serve in return. 

 How you can get started 

If you have a money management business or some clients that are ready to invest then hosting is definitely the way to get started. 

Remember to only work with legitimate hosting companies to avoid ruining your own reputation. A good place to start is with a basic online search. 

If you have enjoyed this article please let me know in the comments below. I base all of my content on questions that people like you ask. I read every comment and reply when I can.