Authors:
Joel Bailey, Consultant
James Borley, Director of Payment Services
Last week the FCA published a series of helpful videos aimed at helping prospective applicants for authorisation or registration in the payments and digital assets space and improving the quality of applications being submitted.
One of the areas touched on was the location of a firm’s ‘mind and management’. Whilst not an actual defined term anywhere, it is generally understood. But then again, it is equally misunderstood. Let’s take a step backward.
As a condition of authorisation, both the Payment Services Regulations 2017 (PSRs) and Electronic Money Regulations 2011 (EMRS) require that a firm must be incorporated in the UK and have its’ head office’ in the UK. This is a direct read-across from the underlying European legislation from which the PSRs and EMRs derive. Unfortunately, though, neither the European legislation nor the UK legislation actually defines what is meant by ‘head office’. This was the case when the first Payment Services Directive was implemented in the UK in 2009, and the Financial Services Authority sought to provide guidance on what ‘head office’ might mean. My esteemed colleague @James Borley drafted the first description in the Approach Document, and it has remained pretty much intact ever since:
“This is not necessarily the firm’s place of incorporation or the place where its business is wholly or mainly carried on. Although we will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control, that is, the location of:
- the directors and other senior management, who make decisions relating to the firm’s central direction, and the material managementdecisionsof the firm on a day-to-day basis, and
- thecentraladministrative functions of the firm (e.g. central compliance, internal audit).”
So, it is not just a firm’s registered address that is important, but the actual location where decisions are made, by directors and senior managers who control the firm’s central direction and day-to-day material decisions.
Firms must therefore demonstrate to the FCA that senior management actively makes key business decisions in the UK, and that oversight functions (such as compliance and internal audit) are effectively UK-based as well. That is the essence of a firm’s ‘mind and management’.
Regulatory Background
This concept isn’t new; it traces back to even older European regulatory principles (e.g., the Post-BCCI Directive and other single market directives, such as MiFID) intended to ensure effective supervision by the home regulator. If the firm physically isn’t here, how can the regulator supervise it?
Stepping back to today, the FCA has sought in its videos to provide a bit more clarity to firms as to its expectations, saying:
“we understand payments and e-money firms are part of wider groups that operate across multiple jurisdictions. However, in our experience, this sort of structure doesn’t give these individuals the ability to be aware of the immediate issues and crises that are impacting the UK businesses at the time. It’s really important for key decision makers to be based in the UK”
Practical Indicators of Compliance
Satisfying the FCA will inevitably involve showing evidence:
- Directors and senior managers reside in the UK, with decision-making centred there, and especially that the CEO and MLRO are UK-based. The FCA may look to test proof of residence through Council Tax statements or lease agreements, etc.
- Board meetings are held in the UK, even if virtual, and that operational decisions occur within the UK. Again, it’s one thing to say “of course we do/will”, and another to be able to prove it. If you’re established, you can maybe point to Board Minutes as evidence, or perhaps the Articles of Association, which should state explicitly how Board meetings are to be held. Also, detailed roles/responsibilities that show UK oversight of strategy, distribution, and key functions, and clear reporting lines to those UK-based decision-makers.
- Where applicable/appropriate, outsourcing arrangements are properly documented with service-level agreements and do not undermine UK control.
No Mind, No Matter?
In our experience, many firms underestimate the importance of proving where and how their mind and management will operate. And, importantly, when and who. For many start-ups, there is a ‘chicken and egg’ debate as to when to make key appointments. Clearly, there needs to be sufficient ‘brains trust’ to actually build the company to a point at which it can convince the FCA it is ‘ready, willing and organised’ to submit an application and commence the business being applied for. But, on the other hand, should it be expected to appoint certain functions (and pay them meaningful salaries) when the FCA application process is likely to take at least 6 months after submission?
The FCA has been increasingly pragmatic in recent years. Whilst it absolutely won’t entertain an “if you approve me, then I’ll hire” approach, it is more accepting of a structured recruitment plan that sets out a clear timeline towards key hires. But not everyone all at once! The ‘who’ will also vary across firms but, as we have said earlier, unlikely to include the CEO and MLRO who, the FCA believes, are the foundations of the application. The FCA will also expect the firm to demonstrate that those key role-holders have appropriate skills, knowledge and experience; both generally, and specifically in relation to the application. Don’t forget, this is an area that the FCA will look to test through competency-based interviews.
Putting it all together
Providing the FCA with clear evidence and supporting information upfront is key to satisfying regulatory expectations and avoiding application problems. Firms seeking authorisation in the UK are clearly adjusting how they structure and prepare their applications to respond to the regulator’s evolving “mind and management” expectations and overall regulatory mindset. Recent FCA authorisation experience shows a trend in how applicants are adapting to reduce delays, withdrawals or refusals:
- Strengthening UK Senior Management and Governance Presence
Firms are increasingly ensuring that senior management who make key decisions are based in the UK and that their day-to-day involvement can be demonstrated clearly. That means recruiting UK-based CEOs, directors or senior managers with appropriate regulatory experience and authority to take decisions locally.
- Better Demonstrating Decision-Making Activity in the UK
Beyond mere residency, firms are preparing evidence showing where and how business decisions are made. This includes documentation of board meetings held in the UK (even if hybrid), detailed roles/responsibilities that show UK oversight of strategy, distribution and key functions, and clear reporting lines into those UK-based decision makers.
- Using Pre-Application Support
Many applicants now take advantage of the FCA pre-application support services (PASS) or engage with the regulator early to clarify how they plan to meet the relevant conditions of authorisation (including “Head Office”). Early feedback helps to manage and align expectations and address potential FCA concerns before submission.
- Avoiding ‘Fly-In/Fly-Out’ Models
Cross-border or group structures that treat the UK entity as a ‘brass plate’ or a compliance admin centre no longer satisfy the regulator. Firms are restructuring so that key functions, such as compliance oversight, risk management and finance, are demonstrably managed within the UK, reducing reliance on overseas management.
- Improving Supporting Documentation
Better quality applications now include structured governance charts, responsibility maps, delegation frameworks and oversight procedures that make clear how control and oversight occur within the UK entity. This documentation also helps satisfy the FCA’s requirement that it can ‘effectively supervise’ the firm.
Firms that adapt in these ways tend to face fewer delays, fewer withdrawals, and quicker determinations from the FCA. Those that don’t risk withdrawals, prolonged reviews or refusals because the FCA sees a gap between how the firm claims to organise itself and how it actually operates.
