DA or AR? How to choose when preparing for FCA authorisation

When it comes to FCA authorisation, fintechs in the UK face a critical decision - whether to pursue the direct authorisation (DA) or the appointed representative (AR) route.

This article will help you understand where each route fits, so you can make an informed decision as you navigate the path to authorisation. Weighing the advantages and disadvantages of DA and AR will help you decide which route is most suitable for your startup.

Two ways to prepare for FCA authorisation

There’s no real way around it: your business will have to be registered with the Financial Conduct Authority (FCA).

"In the UK nearly all financial service activities must be authorised by the FCA." –The Financial Conduct Authority (FCA).

Your first hurdle will be choosing which route to take when it comes to FCA authorisation.

There are two ways to do this:

Appointed representative (AR)

Becoming an Appointed Representative (AR) or Agent involves entering into an agreement with a regulated business, known as a Principal. This agreement grants you the ability to utilise the Principal's FCA permissions to offer financial products or services to your customers.

By partnering with a Principal, they will liaise with the FCA on your behalf and facilitate your registration in the Financial Services Register, streamlining the authorisation process on your behalf.

Adopting this approach has its own pros and cons, namely:

AR pros

  • Saves time - launch within months, not years.
  • More cost-effective - there are fewer capital requirements for FCA authorisation, which enable your business to operate more leanly.
  • Training - as an AR, you will benefit from ongoing training and guidance from your Principal.
  • Focus - you can prioritise your business and product-market fit, rather than worrying about policies.
  • Experience - gaining experience will help you if you wish to transition to the FCA's DA program and strengthen your standing with the FCA.

AR cons

  • Lack of control - as a DA, you may have limited operational independence since your Principal will have authority over decision-making.
  • Adherence to the Principal's rules - you will be required to follow the rules and systems set by your Principal, potentially limiting your flexibility.
  • Limited autonomy - in the AR model, you won't have the opportunity to take on additional ARs, which could restrict your business expansion.
  • Product and service limitations - your offerings will be constrained by the products and services provided by your Principal, potentially limiting your ability to cater to diverse client needs.

Directly authorised (DA)

To become directly authorised (DA), you will need to submit an application to the Financial Conduct Authority (FCA), providing a detailed explanation of your business model and the specific permissions you intend to undertake. The FCA will carefully assess your organisation during the vetting process, which may result in acceptance, rejection, or a request for additional information.

It is common for the FCA to put the application on hold and seek further clarification from you. Expect multiple rounds of questions as part of the evaluation process conducted by the FCA.

Much like AR, there are several pros and cons to DA, namely:

DA pros

  • Autonomy - being directly authorised allows you to make independent business decisions aligned with your vision and goals.
  • Customised processes and systems - as a DA, you have the freedom to implement your own tailored processes and systems that best suit your business requirements.
  • Ability to take on ARs - you have the opportunity to take on additional Appointed Representatives (ARs) under your authority
  • Service flexibility - your services are not limited by a Principal's offerings.
  • Growth potential - you have the freedom to explore new avenues, scale your operations, and expand your business without the constraints imposed by a Principal.

DA cons

  • Increased responsibility - as a directly authorised entity, you bear full accountability for regulatory compliance and cannot rely on a Principal for support or guidance.
  • Demanding process - obtaining FCA authorisation requires extensive effort, thorough preparation, and meticulous attention to detail.
  • Financial considerations - the cost of FCA authorisation for a DA can be substantial. Expenses such as application fees, meeting capital requirements, and staffing for compliance must be taken into account.
  • Time-consuming - the authorisation process for DAs is known to be time-intensive and can be prolonged.
  • Compliance complexities - as a DA, you assume the responsibility of managing and navigating the complexities of regulatory compliance independently.

How to keep your authorisation?

Securing FCA authorisation is just the beginning of your regulatory journey. Once authorised, it is crucial to maintain contact and adhere to reporting obligations to retain your FCA status.

Regular reporting to the FCA becomes a significant and challenging responsibility, considering that approximately 1 in 5 businesses tend to under-report their data.

You may also reach a point where being an AR no longer suits your business needs and transitioning to DA may be the next logical step. There are specific steps that you’ll need to take to ensure a smooth transition. Although FCA authorisation isn’t part of our suite of solutions we can certainly point you in the right direction - contact us if you have any questions.

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