Heading for the exit

When an FSA-regulated firm intends to close down its business, many owners think that simply notifying the regulator will be sufficient to cancel its permissions. However, a firm cannot cancel its licence by merely advising the regulator that it has discontinued its regulated business, or that it intends to do so by a certain date. A firm does not have a right under FSA rules to cancel its permissions. Under the relevant rules the FSA must decide whether or not it will permit the firm to do this.

There are policy reasons behind this approach related to the protection of investors and consumers. The FSA may refuse an application for cancellation of permission if it appears that the interests of consumers would be adversely affected or if it appears desirable to refuse the application in the interests of consumers. Customers often enter into long-term financial commitments through FSA-regulated firms and it is clearly important that their interests are protected when a firm wishes to run off its business and cancel its registration.

The main considerations that the FSA would have concernswhether client money has been properly returned, whether client assets have been correctly dealt with and whether there are any unresolved complaints against the firm. This is not an exclusive list and the FSA can take account of all of the circumstances surrounding the closure of a business. For example, it would be unlikely to readily grant an application where a firm has outstanding liabilities where the owners would be free to set up a new business shortly after absolving themselves from the firm’s existing liabilities. This practice is sometimes referred to as ‘Phoenixing’.

There are a number of conditions that must be met before the FSA will grant an application. Unless a firm can respond positively to each of them, the FSA is likely to refuse to cancel the firm’s permissions. The conditions are:

• All clients have been notified of the firm’s intention to cancel its permissions and how this will affect them.

• All the firm’s regulatory fees have been paid up to date.

• All the firm’s regulatory returns have been submitted.

• All the approved persons at the firm have been told about the application for cancellation.

• The firm has no unsatisfied or undischarged complaints made against it.

• If the firm has not already ceased all regulated activities, it must cease them within six months of the date of the application.

If the firm cannot satisfy the conditions for cancellation, the FSA may refuse the application and instead vary the firm’s permission until such time as the firm can meet the conditions. If it is clear that the run down of the business will take longer than six months, the FSA is more likely to adopt the variation of permission approach whereby the firm’s permissions are reduced in stages until cancellation is formally granted when all the conditions are met.

Until the FSA cancels a firm’s permissions it will be required to continue to make regulatory reports, pay fees and levies and maintain its regulatory capital. It is therefore important that a firm considers the cancellation process as part of its planning to close the business as it remains subject to these obligations until it has been removed from the register.