FCA cracks down on rogue firms with virtual offices

The Financial Conduct Authority (FCA) is rejecting the requests of firms in the financial district of London – known as the ‘City’ – to use virtual offices as their main addresses, as the regulator cracks down on potential rogues entering the finance sector.

The FCA has taken a dim view of those listing a virtual address as their principal place of business when asking for permission to set up a new firm, according to compliance professionals familiar with the process. While there may be cases where it allows such an approach, the regulator is moving away from virtual locations as addresses for head offices.

“I’ve seen the FCA taking much more interest in virtual offices, but also accountants’ and solicitors’ addresses being given as the primary place of business on authorisation forms,” said Matthew Drage, managing director at compliance consultancy Square 4 Partners. He added: “ I have also seen the FCA take more interest in senior individuals from firms that only spend a proportion of their time in the UK.” When a firm applies to the FCA for authorisation, it is asked about both its principal place of business and its registered address – where its work normally takes place and the formal location listed at Companies House respectively.

Several people familiar with the application process said the FCA has accepted some private residences as principal place of business for small firms. However, it is keen to have physical locations its supervisors or enforcers can visit if they need information.

Broadly speaking, the FCA Handbook states that a firm incorporated in the UK should have its head office and registered office in the country as well. While the FCA does not explicitly ban virtual addresses or PO boxes, it does expect a firm to give a physical location where it works at least some of the time, rather than a virtual address where it carries out no work. “If you try to use accountants and solicitors (as addresses) the FCA isn’t interested,” says one compliance consultant.

A key pillar of the FCA’s effort to prevent City scandals is forcing firms to prove their credentials before they enter the market. It argues it is better to stop problems before they happen, rather than get bogged down in years of investigations, legal claims and compensation.

The FCA had announced back in March of internal changes and it was splitting the roles of chief operating officer and authorisations head. Emily Shepperd had the roles of Chief Operating Officer as well as head of authorisations. The creation of a dedicated COO position reflected the broader scope of the role with the FCA having new offices across the country, according to a person familiar with the matter.

The move also reflects an increased focus on hybrid working from the regulator. The FCA told firms during the pandemic that remote working arrangements should not increase the risk of financial crime. They should also not prevent the firm from providing it with information or stop it from having oversight of its own business.

Shepperd, whose career took in BNY Mellon, Aegon, JPMorgan and Pershing before she joined the regulator in 2018, was named by a leading financial publication, one of the most influential women in finance in 2022.

After years of frustrations with excess paperwork and slow responses, compliance experts have sounded a more positive note on the regulator’s authorisation process in recent months. The FCA had been forced to hire about 100 extra contractors to work through backlogs as criticism mounted in 2021. But its latest key performance indicators, covering October to December 2023, show that 97.8 per cent of applications were determined within the FCA’s statutory deadline.