Question: What does the FCA mean by ‘Head Office’ in the UK?
The question should be a simple one to answer, however the context will need to be considered carefully since the Head Office location is more than just a physical office address. A distinction needs to be made between the company’s Registered Office location (i.e. the legal address of the business) and the “Head Office”, which is the location from where key business decisions take place on a daily basis and from where strategic direction is set.
As referenced in FCA guidance, neither the Electronic Money Regulations 2011 nor the Payment Service Regulations 2017 define what is actually meant by the ‘Head Office’ of a firm. The FCA also state that they will judge each application for authorisation on a case-by-case basis. A degree of interpretation is therefore afforded to the applicant firm in defining the arrangements that will support the assertion that its Head Office is in the UK.
FCA guidance states that the Head Office is the location of the ‘central management and control’ which is interpreted by the FCA as the location of:
- the directors and other senior management who make decisions relating to the firm’s central direction, and the material management decisions of the firm on a day-to-day basis; and
- the central administrative functions of the firm (e.g. central compliance, internal audit).
The directors and senior management are interpreted to be the EMD Individuals or the PSD Individuals, depending on whether the firm is applying for authorisation as an Electronic Money Institution (“EMI”) or Payment Institution (“PI”).
Certain business functions should be performed from the Head Office and logically these would be functions that do not make sense to outsource, e.g. regulatory compliance and risk management. That is not to say that outsourced support could not be used to support a central compliance or risk management function. The key issue would be to have the second line of defence in the UK, i.e. the activities of the Compliance Manager, MLRO, Risk Manager etc.
Question: What are the implications for an application for authorisation?
Maintaining a UK Head Office is a pre-requisite for becoming authorised, and for staying authorised. There should not be any ambiguity in the assertions made in the application for authorisation regarding the existence of a UK Head Office. The following points should be considered and could be used to develop content for inclusion in an application:
- Roles – the roles that will be maintained by the business. The staff organisation structure chart (required to be submitted as part of an application) should detail the roles, business functions and reporting lines that are maintained. The focus should be on the roles that are relevant to the delivery of the regulated services, i.e. directors and senior management. The application should then make clear which roles will be based at the Head Office, which will need to satisfy the FCA that the ‘central management and control’ of the business is exercised from the Head Office.
- Individuals – the individuals performing the designated roles and their residential location. Defining the roles is the first step, allocation of individuals the second. It is reasonable that several (sometimes more) roles can be performed by one individual, so the question of whether a UK Head Office is maintained is more to do with the number of individuals allocated to the business to perform the key roles.
- Business functions – the business functions that are performed from the Head Office location will need to be set in the context of the roles that are based at that location. A UK-based compliance lead would support the assertion that there is a UK-based compliance function. Similarly, with the role of MLRO (potentially performed by the same individual).
- Oversight of outsourced functions – all key business functions outsourced by firms will need to be subject to UK-based oversight from roles that would logically be based at the UK Head Office. Appropriate oversight arrangements are a pre-requisite if outsourcing is to take place since responsibility must always reside with the firm.
- Size and complexity of the business – maintain arrangements that are commensurate with the size and complexity of the business. The resources allocated to the Head Office, in particular the number of individuals performing the designated roles should consider the size and complexity of the business.
Developing arrangements to address these points should enable your business to meet the Head Office requirement. Please feel free to contact us if you require advice in relation to the establishment and resourcing requirements for your Head Office or any other aspects of an application for authorisation, including outsourcing frameworks and contractual agreements.
