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7 July 2022

We often come across firms that hold certain regulatory permissions, but don’t use them.

The first one that comes to mind is mortgages. Many firms provided advice in this area pre-2008, but once the credit crunch hit, demand reduced and they pivoted towards other areas.

Now, if they do get a case, they may prefer to outsource it to a specialist. When asked why they retain the permission, a common answer is that it is easier than having to re-apply at a later date if their business model changes.

The FCA has been paying particular attention to firms whose regulatory reporting indicated they had not used a permission during the previous 12 months and in the year May 2021 to May 2022, it carried out 1,090 assessments as part of its ‘use it or lose it’ initiative. This resulted in 264 firms applying to voluntarily cancel dormant permissions and a further 47 modifying them.

Changes to the law have now been introduced to allow the FCA to streamline and shorten the removals process. If it believes you are not using a permission, you will be required to prove you are carrying out the regulatory activity. Failure to take action will result in two warnings, after which the permission will be cancelled 28 days from the date the first warning was issued.

When we ask firms why they retain permissions, but outsource the advice when they have the ability to provide it themselves, the answer isn’t usually the potential for future complaints, but rather a fear that whilst they have PI cover this year, they may not be able to secure it next year if the market in question continues to contract.

Whilst it is easy to appreciate why firms take this stance, it is worth considering that retaining permissions, but outsourcing the advice, carries its own risks.

The risks of outsourcing  

Firstly, there’s the risk to your clients. You should consider the following questions:

  • What due diligence have you completed on the outsourced firm?
  • Have you reviewed their advice process and does it appear robust?
  • Are they completing Triage, or are you? If they are, how do they do this?
  • How do they collate KYC?
  • What is their client communication strategy?
  • Have you reviewed and considered their conversion rate?
  • What percentage of clients are they recommending transfer?
  • Will they complete insistent client transactions?
  • What experience do they have in this marketplace and how long have they been providing advice?
  • What level of PI cover do they have?
  • What due diligence have they completed on you as the referee?

At the outset of any outsourced transaction, your roles in the process should be well defined to ensure the transfer is completed at arm’s length. Otherwise, you could be considered to be influencing the advice.

Secondly, how are clients being charged for this advice? What remuneration does your firm receive for the referral? Does this create a conflict of interest for the business and how will it be managed?

Finally (and most importantly in our opinion), there is the risk that you may not agree with the advice provided. What are your options in this scenario? You could take it up with the adviser, but he is unlikely to change his recommendation once he’s put it in writing, so what is the alternative – speaking to the client? You would then step over the threshold into advice, which would mean starting the advice process again. There is certainly a small minority who may consider saying nothing and would simply allow the advice to proceed unchallenged. After all, it’s not going to come back on you…is it?

Understanding your obligations

The reality is, the vast majority of firms that hold permissions and qualifications understand their fundamental obligation to ensure any advice is in the client’s best interest. If a scenario like the one above happened, you’d likely cease to use the referral firm. However, it doesn’t prevent the initial dilemma.

The FCA’s stance on the removal of dormant permissions has not changed, but it has now been given the power to act more swiftly. It believes this will reduce the risk to consumers who misunderstand or are misled about their exposure to risk and will enable it to respond to inappropriate uses of permissions more quickly.

It is collating more data than ever before through regulatory returns and has openly confirmed it will use it in its approach to supervision. This will likely include communication with firms who hold permissions, but indicate they are not earning income from them. These indicators include a failure to pay regulatory fees, submit returns or complete annual declarations.

Ultimately, the decision about whether to retain dormant permissions is being taken out of your hands and now more than ever, it is time to ‘use them or lose them.’

For more information about updating your regulatory permissions, don’t hesitate to contact us on (0161) 521 8641 or email:

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