Local authorities, and the businesses with which they associate, are under an enormous amount of pressure. Rising costs, disrupted supply chains and under-staffing are all contributing to a sector stretched to the point of snapping. The last thing most firms and local authorities will want to consider when embarking on a new venture, therefore, is whether this activity is ‘regulated’ and how – and indeed if – they need to apply for FCA Authorisation. This is understandable: authorisation by the Financial Conduct Authority (FCA), the UK’s regulatory watchdog for the financial services industry, is complicated, costly, and often long-winded. Even figuring out an exemption can be a baffling process to the uninitiated, and a frustrating one for the veteran. Unfortunately, getting this wrong can spell big trouble, both from a financial, commercial, and even a legal perspective.
Defining regulated activity
The scope of regulated activities covers numerous business services, such as claims management, consumer credit, asset leasing, designated investment, and regulated home finance. The Regulated Activities Order 2001 specifies the full list of activities which are regulated. If applicable, an activity will be regulated and therefore the provider requires authorisation from the FCA before a business can carry it out.
In addition to annual fees, including an initial application fee, FCA authorisation involves a minimum set of FCA-defined standards, demonstration of compliance with industry-relevant rules and principles, and the submission of regular reports that provide evidence of all the elements above. Unless exempt, a firm must be authorised before carrying out a regulated activity. If not, it could face hefty fines, and even criminal charges.
Regulated activities and local authorities
Local authorities are not strangers to undertaking regulated activities, with some examples including employee car schemes, or loans covering travel passes and relocation. Although in some cases local authorities can enjoy exempt status, there are several instances in which this is less clear cut.
Thankfully, the regulatory picture for a local authority acting as a lessee or borrower (say, when leasing plant and equipment from a company, as mentioned above) is usually clear. For the most part, local authorities are defined as corporations by statute, which means they are not a considered a relevant recipient of credit (for example: a sole trader or a partnership of three people or less) and therefore, contracts will be unregulated.
Things get a little more complicated when a local authority acts as the lender or lessor of assets. Most credit agreements are considered regulated unless they fall outside of certain parameters. These are usually where the credit totals less than £160, more than £60,260, or if it exceeds £250,000 but is destined for a business that is wholly owned by the borrower in question. A local authority would need to apply to the FCA for authorisation before undertaking regulated activities such as entering into any agreements in which it acts as a lender, lessor, or sub-lessor.
Is it worth it?
Local authorities can apply to the FCA for a discount on any annual fees, but it is worth considering whether they can avoid carrying out a regulated activity entirely. In addition to the initial fees, applying for authorisation is complicated and time consuming. Even when approved, conducting regulated activities comes with a wealth of administrative burdens, including stringent requirements on the form, content and reporting of agreements.
Unless your firm or local authority wishes to carry out a regulated activity frequently, think about how you could restructure an agreement to make it exempt: for example, by ensuring the amount falls outside of the parameters of a regulated credit agreement, or by removing purchase obligations from hiring or lease agreements.
Tread carefully, however. Exemptions are technical and requirements are not always straightforward, even for specialists. Never throw caution to the wind regarding regulated activity, not least because the consequence of getting it wrong could be costly. If possible, take legal advice and always proceed with caution.