Regulatory Incubation – Regulatory Hosting is set to boom in the UK in 2023

Why you might ask?

BREXIT is long behind us. The FCA and UK Treasury Review of the Appointed Representative Regime behind us. What if you are looking to set up in London or Berlin from the US or Canada?

You may want to launch a Financial Services Business in the UK, and know that a Direct FCA Application could take up to one year from submission. Neither UK or European Regulators like the idea of regulatory arbitrage or letterboxing, which is why the local EEA Tied Agent or the UK Appointed Representative Firm is neither of these because local personnel or at least one local director is based in the country.

25 Years of Regulatory Incubation

As Sturgeon Ventures enters its 25th year of business and 20th year of incubating ventures, our new enquiries are doubling every week! As new entrants into the financial services market want to launch a business, they want a “regulatory ecosystem” that they can trust and that will be nimble and innovative, whilst having governance, processes and procedures around every corner. Regulatory hosting and incubation is part of the nimble mindset. Have you ever noticed that Rolls Royce and Bentley have no commercials? The reason they know the value of their product brings customers to them, is because they are innovative and quietly professional, creative, and nimble. The lesson from knowing your value is that you don’t have to beg people to like you or use your product; they will know that you are innovative and nimble.

Sturgeon Venture’s founder, Seonaid Mackenzie, pioneered Regulatory Incubation and coined the phrase in 2001 for the ‘wholesale industry’, with individuals joining Sturgeon Ventures as Approved Persons with a new venture or partnering fully licensed firms to manage money whilst the advising or fund raising came from Sturgeon’s Approved Persons. Seonaid then discovered the Appointed Representative Regime for the advisor and pulled it across into the wholesale market in 2005, rather than just for the IFA/Insurance Retail Market which is how it was originally intended – truly an example of ‘out of the box’ nimble, creative thinking. The exact kind of thinking that will lead businesses to be nimble. The UK Government needs to remember whilst it only ever considers large banks in its thinking and reporting, the heart of the people also lies in the growth of SMEs and even micro enterprises. The UK has always been at the heart of innovation for most of its history.

Regulatory Incubation Sturgeon Ventures


Appointed Representative regime overhaul

The UK’s Appointed Representative Regime was overhauled, putting more governance in place for the Principal Firms that are licensed by the Regulator; we feel this was really positive for the industry. Unlike Sturgeon, there were some Principals that did not carry out regular financial monitoring of their Appointed Representative Firms, and suspend them from doing business if their solvency came into question(one can check the FCA Register to see if an AR Firm is suspended by the Principal before ending their relationship or if they can put their company back into a good shape, they can then go back to business).

Sturgeon track more than 60 firms offering a similar service today, and many have set up as management companies in places like Malta, Ireland, Portugal and Germany, offering a variety of regulatory hosting services. Hopefully their telephones and emails are jammed too with new enquiries now that British and overseas firms see the value of beginning this way and European regulators see substance is being honoured.

The key now is to set up Tied Agents across the EEA with real people inside that local regulators know are already in business, those companies can get directly authorised locally, if need be, or set up in a nimbler time frame. A Tied Agent is the EEA version of the Appointed Representative Regime under MIFID. A Tied Agent with a local office, local directors and maybe a salesperson, can be owned by a UK or Non-EU owner.

The terms Appointed Representative and Tied Agent were originally for the insurance industry’s sales teams, i.e., appointed by the Principal Firm or tied to them. In other words, they are not directly authorised ever, their personnel are approved persons for selling or advising under the “Principal Firm’s” license and their own firm (the AR or TA) is simply a brand for them to market under and grow a business before potentially breaking away and getting directly authorised. The individuals are assigned the function CF1 (AR) in the UK i.e., a director of the AR firm or a CF4 (a partner of a UK LLP) which is the Appointed Representative Firm. There are many benefits, not just, does my new business model work, but also how to run a business. Many start ups have had several years inside a large institution, and they may be able to make cups of tea for their colleagues. But have they ever registered a trademark or know what data protection really means in practical terms, or that their companies need to register with the Information Commissioners Office (ICO)? These are the types of business issues start ups need to learn, not just about regulation.

Increasingly, we are seeing more firms that are now getting directly authorised not to carry out any regulatory functions but just to host.

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