With the increased rigour with which the FSA has evaluated firms applying for mortgage-activity permissions over the past few years, anyone could be forgiven for taking a deep breath and deciding to do something else instead.
Not only have we seen the capital, liquidity and financial modelling requirements for risk management markedly increase, the expectations of corporate governance, operations and third-party providers have also been set much higher: part of the overall drive to raise the applied standards of the Threshold Conditions.
It is widely known that many currently authorised firms may not have been granted their current permissions, if they were to have applied more recently.
In case you think the new barrier to entry unfair, the arrival of the Financial Conduct Authority (FCA) to join the new Prudential Regulatory Authority’s (PRA) approach means these firms will shortly (and indeed already are in some cases) experience the more rigorous regime first-hand.
A core part of the paperwork for the application pack to be submitted is the Regulatory Business Plan, which many firms did not recognise is a requirement and of which there was previously little prominence given in the FSA website or application forms.
Too many firms still submit a “me too” business plan, insufficiently thought through and with absence of depth, rigorous challenge and contingent thinking.
It is very tempting for firms to knock together a plan without subjecting it to sufficient challenge by an external pair of eyes.
More effective plans are frequently achieved by getting some expert input to shape the proposition at the beginning and save the firm from the turgid fate of reviewing draft no. 17.
Demonstrating that you really have a workable, watertight lending model with an assured funding line is almost the straightforward part of the exercise.
Although the permissions that are sought need to reflect the activities set out in the strategic business plan for a three to five-year horizon, the canny applicant not only articulates what they plan to define as their core business, they also “build in” sufficient contingency for their most likely alternative, or supplementary, strategies.
Thus, an applicant seeking to become a straightforward residential lender may have identified opportunities that read-across to the buy-to-let market.
Although this is currently unregulated, the astute applicant plans a common standard of governance and operations, treating this area (which will become regulated in due course) as if it already were.
For many firms, there is nothing more difficult than running a business to two standards and managing limited resource in that environment.
As the FSA reorganises its internal processes, staff and structures in readiness for the transition to the new model, we have also seen an internal review of the authorisation process itself.
This aims to make it a more responsive model able to cope with the volume of applicants – for there are many, despite the recession.
There has been a significant volume of both new applicant firms and firms submitting applications for individuals being appointed to Significant Influence Functions.
For the latter group, becoming an Approved Person (SIF) may not be straightforward if a previous employer has suffered difficulty, even failure, in the past few years. This is even more challenging if the applicant was on the board at the time.
However, a supportive external adviser can help candidates review their CV, gain a new understanding of the regulatory environment and prepare appropriately to explain their past learning and future aspirations.
This is essential preparation for the appraisal meeting. For a number, there will inevitably be a taped second interview, although by that stage many a firm decides that they will reconsider their prospective candidate.
With the new model of PRA and FCA now becoming more transparent and the wave of enforcement actions and fines hitting the press, a bystander could be forgiven for throwing up their hand in horror at the idea of joining such a community.
Yet, for a well prepared firm and individual with a sound business model, the achievement of being granted permissions comes at the end of a rigorous process that should reassure those putting up the funds.
Every cloud has a silver lining…
