Part 1: The true cost of being Directly Authorised

In recent years, the financial advisory landscape in the UK has undergone significant regulatory transformations with the introduction of Consumer Duty. The Financial Conduct Authority (FCA) has intensified its oversight, leading to increased challenges for firms seeking direct authorisation (DA).

In this blog series, we delve into the current state of DA approvals, the operational demands on DA firms, associated costs and why joining a network could offer you benefits that you either didn’t know existed or haven’t considered that you need before.

Declining DA approvals: A data-driven insight

A freedom of Information request was sent to the FCA by Paul Day from Network Consulting Services which highlighted a noticeable decline in the number of firms achieving direct authorisation since 2020.

Image credit: Paul Day, LinkedIn

Projections for 2025 suggest a continuation of this trend, with fewer firms expected to secure DA status due to The FCA's stringent regulatory compliance requirements and rigorous scrutiny.

Operating as a DA firm necessitates a robust internal compliance infrastructure with key personnel required to meet the minimum requirements. Key personnel include:

• Senior Management Function (SMF16) – Compliance Oversight: The individual holding this role is responsible for ensuring that the firm complies with FCA regulations and maintains robust compliance processes. This is a mandatory role in any DA firm and the individual must be approved by the FCA before taking on the position. They play a critical role in risk management, regulatory adherence and governance within the firm. If the firm fails to meet regulatory standards, the SMF16 can be held personally responsible under the SM&CR rules.
• Senior Management Function (SMF17) – Money Laundering Reporting Officer: This is a position within a firm that is responsible for overseeing the firm’s compliance with the FCA’s rules on systems and controls against money laundering. They will need necessary skills and knowledge, from training and experience, to be effective. The level of their skills and knowledge should be in line with the size of the firm and its risk of harm.
• An FCA policy specialist: Keeps abreast of evolving regulations and ensures that the firm's policies align with current standards and that they can quickly adapt to changing standards.
• A case reviewer: Conduct regular audits of client files and advisory processes to ensure compliance and identify areas for improvement.

The financial commitment to maintain a compliant DA firm is substantial before you have thought about standard advisers and support staff. Based on industry salary surveys, the average annual salaries for the key roles mentioned above combined is around £200,000 per year.

These figures represent base salaries and do not account for additional staff such as advisers and administrators or costs such as recruitment, ongoing training and benefits. For many firms, especially smaller entities, these expenses can be prohibitive.

Capital adequacy requirements for DA firms

Capital adequacy refers to the minimum financial reserves that a DA firm (or network) must hold to ensure that it can meet its obligations, cover risks and maintain stability in the event of unexpected losses. The FCA enforces capital adequacy rules to protect clients and the broader financial system from firms becoming insolvent.

The investment firm’s prudential regime requires firms to hold at least 3 months’ worth of fixed annual costs with a minimum capital requirement of £20,000, however, this figure could be much higher depending on the firm’s structure and permissions. For example, for those that deal with Defined Benefit pension transfer advice, this figure can often be in the range of £50,000 or more due to the increased risk.

DA firms must report their capital levels regularly to the FCA. If a firm’s capital falls below the required threshold, the FCA can restrict its activities or even remove authorisation. The introduction of the Consumer Duty regime has further increased compliance costs for DA firms, as they must now allocate additional resources to meet higher regulatory expectations regarding consumer protection, fair value, and transparency.

By contrast, firms that operate as appointed representatives under a network do not have the same capital reporting requirements. This is because the network itself is responsible for ensuring compliance with FCA regulations, including maintaining adequate financial resources. The network effectively absorbs many of the regulatory risks and associated costs, allowing ARs to focus on their core business activities without needing to hold significant capital reserves or directly report their financial standing to the FCA. This makes the AR model particularly attractive to smaller firms or sole advisers who want to benefit from regulatory oversight without the burden of direct financial compliance.

The Network advantage

For some, being directly authorised is the right decision, however, you have to have the time, finances and confidence in your experience to cover any eventuality. There is a growing number of people now deciding that networks do not hamper their freedom, but can add value as a partner. Becoming a member of the ASHL Group of Networks can provide a faster and more cost-effective route for advisers looking to focus on delivering great client outcomes without the burden of full regulatory oversight.

A faster route to authorisation

Becoming DA involves a long, complex authorisation process, often taking 6-12 months or more depending on the FCA’s workload and requirements. The regulator expects firms to provide a robust business plan, capital adequacy proof, detailed compliance frameworks, risk management processes and evidence of strong financial controls as an absolute minimum.

For advisers who want to get up and running quickly, this can significantly delay business operations and income generation. When you join a network as an appointed representative (AR), you bypass the lengthy DA authorisation process. Instead of waiting for potentially a year or more for FCA approval, you can typically start trading within 3-6 months, because we as a network already hold the necessary regulatory permissions and we support you in your FCA application to ensure that all the required information is submitted the first time.

The ASHL Group has two networks, Sense which supports independent propositions and Lyncombe is our network that offers a pre-built proposition where we have conducted the initial and ongoing research, due diligence and design decisions enabling you to focus exclusively on client advice and service. At the ASHL Group of Networks, we are agnostic as to your route to market, focussing on client outcomes.

No matter your choice of proposition, our internal teams will help to support you in creating the right foundation for your business. If you choose to write your own proposition, industry leading support is on hand, if you choose a pre-written investment proposition, then the hard work is already done for you and you will have exclusive access to the award winning Rockhold Asset Management.

Furthermore, our Novations and Agencies team works closely with all providers, understanding the necessary requirements to ensure a smooth transition with minimal disruption to you, your clients and your ongoing revenue. You will also benefit from our adviser pay team who will be your dedicated point of contact to ensure that commission is paid to you weekly, without delay.

Shared compliance & regulatory costs

Instead of hiring expensive compliance staff, who can be both costly and difficult to source, the ASHL Group of Networks provides a centralised compliance function, ensuring that key regulatory responsibilities are managed on your behalf. This includes FCA reporting, audits and file checking, allowing you to focus on running your business with confidence.

In addition to centralised oversight, compliance supervisors are available to support your day-to-day needs. Whether it's guidance on regulatory changes, assistance with client file reviews or ensuring best practices are followed, our compliance experts provide practical support to help advisers to navigate the complexities of FCA requirements efficiently. This structure not only reduces administrative burdens but also enhances compliance standards across your firm.

Reduced Professional Indemnity Insurance (PII)

PII is a mandatory regulatory requirement for financial advisers, covering claims of inappropriate advice, negligence or regulatory breaches. PI insurers are risk-averse, often charging DA firms higher premiums due to them often being a smaller firm without the compliance support of a network so the insurers view this as being a higher perceived risk of regulatory non-compliance.

DA firms often face PI costs of around 3.20% per year, depending on the business model and risk profile. Sense firms’ premiums compare favourably against the industry average. Currently, contributions across the network stand at an average of 1.54%, for compliant PII. But why are we paying less? Sense spent time working with our brokers to provide a bespoke arrangement for Sense firms, but with the costings of an umbrella policy.

In 2024 our independent network, Sense, was the inaugural recipient of the BareRock ‘Club 20’ membership signifying the highest level of premium PI cover to its members. Our model leverages the benefits of being a network member, whilst offering a bespoke arrangement with individual underwriting for each firm but with the costings of an umbrella policy.

Lower FCA fees & capital adequacy requirements

DA firms are required to pay FCA authorisation fees which can cost anywhere between £1.5k–10k+ depending on the permissions that you require. Additionally, they must maintain capital adequacy requirements, which are often £20k–£50k+ in retained capital and submit detailed financial and regulatory reports to the FCA. For many smaller firms, these costs are a significant barrier to entry and a major cashflow burden.

By joining Sense or Lyncombe as an AR, these financial pressures are alleviated. The cost of FCA authorisation is covered by the network, removing the need for a significant upfront payment and ARs are not required to hold large capital reserves. This means that rather than tying up cash in regulatory obligations, firms can focus on running and expanding their business, confident that their compliance and financial requirements are being expertly managed.

Furthermore, it is important to remember why you have joined the industry. As an adviser you are helping people to make their dreams a reality and you do this by spending time with them, getting to know them, creating them a personal financial plan and taking them on a journey. Running an advisory business takes time away from working with your clients to the point you might start to feel that you do nothing but regulatory admin. Having the support of a network to relieve these pressures gives you back that time to do what you do best, working with your clients.

Summary

In the first part of this series, we have covered the costs and compliance needs associated with being a DA and given you a lot to think about in terms of what a network can offer in this area. In the next part of the series, we will be focusing on the regulator’s expectations for the year ahead.

If you’re ready to check out the range of benefits on offer as a Sense or Lyncombe member, take a look at our network services and benefits brochures below.

Lyncombe Consultants services and benefits brochure

Sense Network services and benefits brochure