This note provides an answer to the most frequently asked questions regarding the establishment of an investment advisory firm in the United Kingdom (the “UK“).

1.     What choice of legal entities is available?

Investment advisory firms in the UK are generally established as private limited companies (“LTDs“) or limited liability partnerships (“LLPs“).

A LTD can be incorporated with a nominal amount of capital (e.g. £1). An LLP can be incorporated without any capital.

Both entities provide limited liability to their directors, shareholders and members.

However, while an LLP is tax transparent (i.e. any income generated by the LLP is taxed directly on its members), a LTD must pay corporation tax at a rate of 20% (reducing to 19% with effect from 1 April 2017).

The incorporation fee for a LTD or an LLP is £40 (or £12 if the application is submitted online).

2.     Does an investment advisory firm need to be authorised?

An investment advisory firm generally needs to be authorised by the Financial Conduct Authority (the “FCA“) before it can provide its services to clients.

In certain cases, for example where the firm provides its services only to group undertakings, no authorisation is required.

3.     What activities can an investment advisory firm carry on?

Investment advisory firms are generally authorised to carry on the following activities:

(1) the activity known as “arranging deals in investments”, which includes originating and executing private equity, venture capital and other investment transactions; and

(2) the activity of advising on investments, which includes making investment recommendations to an investor or potential investor (including an investment fund).

4.     Can an investment advisory firm act as the manager of an investment fund or provide portfolio management services?

An investment advisory firm is not generally authorised to act as the manager of an investment fund or provide portfolio management services to investors.

It is possible however to arrange for a independent service provider to act as the manager of an investment fund or segregated account in circumstances where the manager would receive investment advice from the investment advisory firm.

Independent managers are commonly used when launching investment funds operating in sectors (such as private equity, venture capital, real estate and infrastructure) that do not require frequent trading decisions.

Independent managers can be based onshore (i.e. in the UK) or offshore (e.g. in the Channel Islands or Cayman Islands) depending on the tax structure of the fund or segregated account.

The fees of an independent manager start from approximately £2,000 per month, plus a set-up fee of an equivalent amount.

5.     Can an investment advisory firm provide its services to retail clients?

An investment advisory firm can be authorised to provide its services to retail clients.

Firms providing their services to retail clients are however subject to higher scrutiny by the FCA and must comply with more onerous conduct of business requirements than firms that provide their services only to professional clients.

6.     Can an investment advisory firm hold or control client money or assets?

An investment advisory firm cannot hold or control client money or assets.

This is rarely a disadvantage however given the separation that often takes place in fund structures between the entity performing the management function and that performing the custody function.

7.     How much does it cost to obtain FCA authorisation?

The fee payable to the FCA in order to obtain authorisation of an investment advisory firm is £1,500.

The fee payable to a consultant (such as FS REG) engaged to provide assistance in connection with the authorisation process ranges from approximately £5,000 to £7,500.

8.     How long does it take to obtain FCA authorisation?

The FCA authorisation process generally takes between four and six months from submission of the application and it usually takes two or three weeks to prepare the application.

9.     What if the firm cannot wait that long?

An investment advisory firm can commence its activities before FCA authorisation is granted if it registers itself as an “appointed representative” of an existing FCA authorised firm.

It generally costs approximately £2,000 per month, plus an upfront fee of an equivalent amount, to register and operate as an appointed representative of an existing FCA authorised firm.

If an investment fund is being launched, the authorised firm providing the appointed representative registration may be available, in certain cases, to act also as the independent manager of the fund at no additional cost.

10.     How much does it cost to maintain the FCA authorisation?

The ongoing fees payable to the FCA vary depending on the annual income of the firm and the type of customers the firm deals with.

An investment advisory firm having an annual income of £200,000 which deals only with professional clients can expect to pay an ongoing FCA fee of approximately £1,500 per annum.

If the same firm had an annual income of £1 million, the ongoing FCA fee would be approximately £4,000 per annum.

11.     Is an investment advisory firm subject to regulatory capital requirements?

An investment advisory firm generally requires on authorisation either:

(1) Euro 50,000 (or its foreign currency equivalent) in regulatory capital; or

(2) if professional indemnity insurance (“PII“) is put in place, £5,000 in regulatory capital (this is the option most frequently chosen).

The regulatory capital generally consists of fully paid issued share capital in the case of a LTD or fully paid partnership capital in the case of an LLP.

If option (2) is chosen, the firm can expect to pay a minimum of £3,000 per annum in PII premium.

12.     Does an investment advisory firm need to appoint auditors?

Whether auditors need to be appointed depends on the size of the firm and the type of activities that it carries on.

A firm that has opted into the Markets in Financial Instruments Directive (“MiFID“) is generally (but not always) required to appoint auditors irrespective of its size.

By contrast, a firm that is exempt from MiFID is required to appoint auditors only if it is not subject to the audit exemption for small companies.

Such exemption applies if a company (or LLP) meets at least two of the following requirements: (1) annual turnover of not more than £10.2 million, (2) balance sheet total of not more than £5.1 million and (3) average number of employees of not more than 50.

The fees payable to an auditor to carry on the annual audit of a small company (or LLP) start from a minimum of £3,000.

13.     What is the minimum number of individuals that are required to establish an investment advisory firm?

It is possible for a single individual to be the sole director and shareholder of a LTD authorised by the FCA.

The above structure is not very common however and is likely to result in the firm being required by the FCA to appoint another FCA authorised firm to act as its “locum” to provide cover, for example, if the sole director and shareholder becomes incapacitated.

For such reason, investment advisory firms are generally established by at least two individuals, one of whom can be a part-time employee, director or consultant of the firm.

14.     Do the relevant individuals have to be based in the UK?

There is no need for all individuals involved in the running of an investment advisory firm to be based in the UK.

It is important however that, if one or more individuals are based overseas, the “mind and management” of the firm remains in the UK.

This means that the UK must be the place where material management decisions are taken on a day-to-day basis and central administrative functions of the firm are based.

Having a UK based managing director is generally sufficient for the “mind and management” of a firm to remain in the UK, even if other individuals (e.g. non-executive directors or shareholders) are based overseas.

15.     Does an investment advisory firm require a compliance officer?

An investment advisory firm requires a compliance officer but the individual performing that role can also perform other roles for the firm. He can, for example, also perform a director or investment advisor role for the firm.

The individual performing the compliance function must have a sufficient degree of competence to perform that function but no formal qualifications or examinations are needed.

There is no need for the relevant individual to be a full-time employee of the firm and, in fact, many investment advisory firms engage external part-time consultants to act as their compliance officers.

16.     Can an investment advisory firm provide its services on a cross-border basis into other European Union (“EU”) countries?

Currently, a UK investment advisory firm can provide its services on a cross-border basis into other EU countries pursuant to a MiFID passport.

When Brexit is implemented, it is expected that UK investment advisory firms will continue to be able to provide their services on a cross-border basis to professional clients based in the EU under the MiFID 2 directive.

This is because MiFID 2 contains a regime known as “third country firm regime” which applies to investment advisory firms established in non-EU countries that have adopted a legal and supervisory framework equivalent to that adopted by the EU.

Since the UK has already started to implement the requirements imposed by MiFID 2 into its national laws, it is expected that the UK will be recognised as an equivalent non-EU country and will therefore be able to benefit from the “third country firm regime”.

It is expected therefore that, for example, UK investment advisory firms will continue to be able to act as investment advisors to professional investors and investment funds based in the EU (including funds domiciled in Ireland, Luxembourg and Malta) notwithstanding Brexit.

If an investment advisory firm wishes however to provide its services to retail investors after Brexit, it may be required, depending on the circumstances, to establish a branch in the relevant EU country.

Disclaimer: This article provides general information only. It is not intended to be comprehensive and does not constitute the provision of legal or regulatory advice. FS REG is not responsible for any action taken or omitted to be taken on the basis of the information contained in this article. © FS REG 2017 All rights reserved