UK Forex License

October 7, 2016 Commercial

INTRODUCTION

I was recently instructed to advise a company registered offshore trading in excess of £100 million pounds a year on registering with the FCA for a forex license which typically allows you to offer a range of financial investment services, such as currency exchange, commodity trading, CFDs and indices.

The following is not be used as legal advice but guidance that i hope proves useful, much of this guide is focused on one specific type of application. If you have any specific questions about another route feel free to contact me via my website and i shall do my best to help. You can find more information on instructing me on my website.

The FCA are reluctant in qualifying an applicant, in my opinion this is based on the fact that it has now become a difficult task for the regulator to control business practises in the UK, we only of course have to look as far as 20/5/15, when the FCA imposed a financial penalty of £284,432,000 to Barclays Bank PLC (Barclays) for failing to control business practices in its foreign exchange (FX) business in London.

It is the Financial Services & Markets Act 2000 (FSMA) that regulates the financial service markets in the UK.

Under Section 19 of the FSMA, any person who carries on a regulated activity in the UK must be authorised by the FCA or unless otherwise is exempt. If you do think you fall under this category than you must look at a copy of the FSMA, as well as secondary and related legislation, that can be found on the Treasury’s website.

When registering there are two questions that you must consider.

The first question would be whether it is Exchange or Speculation that you wish to register for. If you are simply registering for Exchange than you do not register with the FCA but instead the HMRC.

Assuming it is speculation, you would have to register with the FCA as you are providing a regulated activity as defined in Part II of ‘RAO’. It is chapter 2 of ‘PERG’ that deals with this specifically. I have deliberately not gone in-depth with this for the purposes of this guide, however again i am happy to help if you require further information on the above.

GETTING AUTHORISED 

Once decided you need to be authorised, the FCA have application forms that are ‘pre pack’ for certain applications. If you have a firm and it falls in one of the following than you can use a pre pack form:

If this is not the case than you can use the connect system or build your own application. The Connect system is online and I personally have found it to be quicker and effective.

There are a number of sub categories. I am just going to be looking at the “solo regulated firms” category. Further you will find a number of other subcategories and i will be looking solely at “wholesale investment firms”. This is again subdivided into further categories. The two i am concerned for the purposes of this are the non complex and the complex securities and futures firm. Please note i have been specific on the “type” of application i am discussing.

SECURITIES AND FUTURES FIRMS (NON – COMPLEX)

Some may fall under this category, for this particular type the application fee is £1,500.

Securities and futures firms’ arrangers and advisors can recommend a particular investment to an investor. They can make deals on behalf of their customers (which require the ‘arranging deals in investments’ permission) but the decision to invest must be taken by the customer. As this is not the area i am looking at, I shall not define what the required activities are or what applications are required. Again i am more than happy to help if you require some specific information in this ‘bracket’.

SECURITIES AND FUTURES FIRMS (COMPLEX)

In making this application there is an Application fee of, £5,000 (£25,000 for multilateral trading facilities, there is a slight difference in the application process in the MTFs application as a meeting would have to be setup with the FCA if you would are applying for Part 4A permission).

In brief firms that should apply using this form include:

•principals or agents that clear and settle their own transactions, subject to market risk

•brokers that are the main party to a transaction, acting as buyers / sellers for their own account and risk

•multilateral trading facilities (MTFs)

Required activities

It is the “required activities” that i have discussed in this guide. In brief for complex SFF as oppose to the non complex mentioned you will be:

•dealing as a principal

•investments: advising, arranging deals, dealing as agent, making arrangements with a view to transactions

•agreeing to carry on regulated activities

•arranging safeguarding and administration of assets

•safeguarding and administration of assets

Although I have described what regulated activities are above very briefly if you wish to have further information on this than I can give you a detailed breakdown as this is a pivotal part of the application.

One thing to note is that if the firm is to hold and control client money you will also fall into IFPRU (prudential sourcebook for investment firms) unless you have a limitation added to your dealing as a principal permission. I will be using the Prudential sourcebook for investment firms, it covers all aspects in respect of this part of the application. Without complicating matters further this simply is an addition on your application, you will find in my final conclusion of the document what we will have to show for this. The IFPRU handbook is onerous and complicated. It is too detailed to go into now, however I will give a brief overview of what must be shown below.

You can take it out the IFPRU ambit, by taking a standard limitation out this would be the ‘matched principle brokers’ limitation – if you choose to use this, the application fee would then be £1,500.

WHAT FORMS DO I NEED TO COMPLETE?

There are a number of forms that you need to complete for your application. I will go through each one in turn. It is this process that takes most of the time. I have briefly mentioned each subheading that needs to be covered.

CORE DETAILS 

  • Contact details and timings for this application – inevitably this will have to be provided.
  • About the applicant firm – about the firm and how it will be setup. This will include full details of the company you wish to setup. Not just your company but also details of any auditor and any accountants involved. You will note that at the end of the document we can add any of such information.
  • Details of auditor / reporting accountant
  • Personnel
  • Systems and controls – please note there is an IT questionnaire but this is to ascertain the actual system you will be using, whether you are meeting the business transaction reporting, disaster recovery systems.

SUPPLEMENT FOR COMPLEX SECURITIES AND FUTURES FIRMS

Please note this particular part is complex and is very lengthy to complete again I have discussed the subheadings in brief and this not to be used as complete guidance.

Regulatory business plan

This is when your business plan will be assessed so that it is authorised for the correct regulated activities, investment types and client types, and assess the adequacy of your resources and suitability to carry on that business.

The FCA will:

• identify all the regulated activities and any unregulated business that it intends to carry on;

• identify all the likely business and regulatory risk factors;

• explain how it will monitor and control these risks; and

• take into account any intended future developments.

  • Background to and description of proposed business
  • Clients – details of how you will market and hold information
  • Income – how you will be remunerated in particular will it come from profit made from the business
  • All business activities – this is about managing the risk and how you will do it

You will have to identify both:

External risks

• identify competitors and assess their reaction to the applicant firm’s presence in the market, if applicable; and

• consider critical economic factors which should then be analysed and assessed.  For example, it may be useful to explore the effect on your business if there were large-scale local redundancies, a recession in the economy, low interest rates or limited demand for your products/services.

Internal risks:

• undertake a sensitivity analysis of various scenarios and the possible outcomes (this could be a reduction in business or an equally large increase in business – for example, towards the end of a tax year);

• consider how you would manage if you lost key staff;

• prepare and maintain a contingency plan that deals with your identified key risks.

  • MiFID business
  • Outsourcing with third parties – if you do wish to outsource function you would have to explain to who and why. Please note COBS (reg obligations) you cannot outsource.
  • Scope of Permission required – this area will depend on whether you wish to hold client money, whether you may be exempt from MiFID, understanding your limitations dealing as a principal.
  • Financial resources – this is split into
  • The Capital Requirements Regulations (CRR)
  • The Capital Requirements Directive (CRD)
  • The Markets in Financial Instruments Directive (MiFID)

In your application you will probably into one of the following:

IPRU (INV)

Securities and futures firm (which is not a MiFID investment firm)

Securities and futures firm (which is an exempt BIPRU commodities firm or an exempt IFPRU commodities firm)

An exempt CAD firm

And than you would have to identify the Prudential sub-category

  • Financial resources

Limited company

You will need to submit the following:

• Fully paid-up ordinary shares: These are ordinary shares that you would have been paid for in full. Ordinary shares are the most common type of share.

• Share premium account: This is a reserve of money set up in your firm’s accounts to account for the issue of new shares above their par value.  i.e. if you issue some shares at £1 each, and you keep some back which you then sell at £1.50 each, you put the extra 50p into the share premium account.

• Preference shares: These are shares that pay a fixed dividend. Holders of preference shares receive their dividend before holders of ordinary shares.

• Audited reserves: These are past earnings that your firm has retained, as verified by its auditors.  For firms not required to appoint an auditor for their accounts under the Companies Act 1985, these will be unaudited.

• Verified interim net profits: These are the net profits made after your firm’s last annual financial statement, as verified by its auditor.  For firms not required to appoint an auditor, under the Companies Act 1985, these will be interim profits which have not been verified by an auditor.

• Revaluation reserves: These are reserves kept to allow for the depreciation of any assets.

• Subordinated loans: These are loans that rank below other un-subordinated debt.

  • Personnel – Who will be carrying out the controlled functions.
  • Compliance arrangements
  • Compliance procedures – this is the confirmation you have the correct documented procedures in place.

Financial crime – you will have to describe the procedures you have put in place to counter the risks that it might be used by third parties to further financial crime.

FEES AND LEVIES

Sometimes this is an important question for those wishing to get registered hence i shall try and cover this matter as fully as possible. The fee structure is not simple and is broken down into various blocks.

If you are authorised to carry on investment business then it is likely to be allocated to one or more of the following FCA fee blocks:

• A12 or A13 – Advisory arrangers, dealers or brokers, either holding and controlling client money/assets  (A12) or not holding and controlling client money/assets (A13); and/or

• A14 – Corporate finance advisers.

The fee for each of these fee blocks is based on tariff data submitted within Section 6. They will use answers you have given to calculate your invoice for the first fee period.

It is difficult to give a quote as it depends on which block you fall in. The FCA do not give you a figure at this stage and this is provided when one starts the application process.

INDIVIDUAL FORMS

This is just the fit and proper test so to speak. It is a decision you have to make in what you wish to disclose, ideally it is best to disclose as much as you can so their are no questions.

In brief the FCA’s approval process includes:

•the submission of an application for approval for an individual to perform a controlled function at an authorised firm; and

•the FCA’s assessment and determination of that application. Appointed Representative Form

APPOINTED REPRESENTATIVE FORMS

This is evidently simple.

CHECKLIST AND DECLARATION

IT QUESTIONNAIRE

To conclude, the process itself is fairly complex and onerous. It is almost a question of dealing with the FCA during each step as described above.

It is also important to note the above document has been drafted to provide some guidance and not legal advice. It has also been drafted for one particular type of application and may not be useful for what you wish to apply for. If this is the case please contact me and i shall do my best to assist.