Rejected? Here’s why your licence application failed.

Written by Tiana Whitehouse, Co-Founder & Managing Director at SWOT Team Consulting

In our last piece, we talked about the subtle signs that a regulator could be ‘ghosting’ your licence application. While some of the reasons behind this phenomenon are due to external factors outside of a crypto firm’s control, there are many common mistakes that will translate into longer assessments and (very often) lead to an unsuccessful application.

You can expect the regulator to ‘swipe left’ on your profile if your business falls into any of these categories:

1. The Stranger

Many start-ups do not realise the critical importance of arranging an introductory meeting with the regulator prior to submitting an authorisation application. The official purpose of these meetings is to present your business and proposed products and services, as well as confirm that your regulatory strategy is correct (i.e. that you are applying for the right authorisations or licences).

Another essential outcome of the pre-application meeting is to let the regulator know that your business and key senior leaders are legitimate and serious contenders for regulated status.

Depending on the jurisdiction or specific department handling your application, you may not be able to secure a pre-application meeting. This is particularly unfortunate for start-up firms because you are beginning your relationship with the regulator as a complete stranger.

If you find yourself in this situation, make sure that you schedule a pre-submission review of any online material related to your business and key senior leaders to ensure it is updated, provides a consistent message and generally lends an air of authenticity and legitimacy to your project. A simple ‘comms makeover’ can significantly increase your chances of being taken seriously.

2. The Overachiever

The whole point of FinTech is to introduce revolutionary ideas and services into the traditional financial system. However, many businesses make the fatal error of trying to take on too much too soon. Presenting a business plan that is very complex or overly ambitious is a red flag to your licence assessor because it indicates that you have not truly thought through the requirements and internal resources that would be needed to bring it to fruition.

For many FinTech start-ups, the planned products and services span into multiple regulated areas and therefore require a suite of specific licences or authorisations to implement. If you do not have a significant amount of financial backing and a well-researched and realistic Regulatory Business Plan, the regulator will not see your company as a serious contender. They will have seen firsthand that many start-ups run out of funds before acquiring crucial regulatory authorisations due to poor planning and strategy.

The importance of including the right expertise at the earliest stages of formulating your business plan and regulatory strategy cannot be understated. We always recommend that after determining the most appropriate ‘regulatory hub,’ companies should focus their efforts on applying for the least complicated authorisation first. This gives the regulator a chance to get to know your business and gives you time to establish the company as a willing complier who is committed to operating within the regulatory framework. Once you have established a good relationship and rapport, let the regulator know that you wish to apply for the next licence/authorisation and seek their advice on what you should do next.

3. The Peter Pan

If your company’s brand strategy is hyper-focussed on the founders’ youthfulness and disdain for authority, this will probably not bode well for you in the licence application process. Regulators tend to be a conservative bunch and will not be impressed by the tech start-up ‘bro culture’ or the flat organisational hierarchies advocated by crypto firms.

Crypto founders who are looking to level up to a regulated business need to show a commitment to maturing their governance function and proactively demonstrate to the regulator that they can meet their directors’ duties.

We know that taking training courses and holding formal Board meetings is rarely at the top of the priorities list for founders. Nevertheless, investing time and energy into learning about good corporate governance and ensuring that your Board has the right skillset to manage the business is non-negotiable.

4. The Catfish

Thanks to your third-party consultants, you’ve managed to submit a great looking application supported by well drafted policies and procedures. But this wonderful first impression starts to dissipate after the regulator engages with you directly and it becomes increasingly clear that your business practices and technical expertise do not match your application at all.

Regulators are wise to the practice of purchasing ‘off the shelf’ licence application supporting documents and many licence assessors can immediately identify the consulting firm that prepared them because they are nearly identical to those submitted by other applicants.

Templated compliance documents are an amazing tool for start-ups who need guidance in the requirements of running a regulated business. However, it is critical that you make the effort to tailor the templates to your actual business practices and company values. This means that executive directors and key business stakeholders must commit sufficient time and resources to working with their consultants on the drafting process.

5. The Drifter

Crypto firms who cannot demonstrate commitment to the regulatory business plan submitted with the application are unlikely to have their authorisation approved. If your business is constantly changing strategies or missing deadlines, the regulator will see this as a sign that you lack focus and do not have sufficient project management resources.

Founders must keep in mind that they will be required to notify the regulator of any major changes to the business while the licence application is pending. This includes changes to the proposed products or services, the CAP table, directors or other key senior leaders, outsourced providers, corporate structure, business locations, etc. The regulator views such changes as significant and will re-assess the application components that are impacted by the changes.

Start-ups should refrain from submitting their application to the regulator until any major business decisions or planned changes have been formally implemented. While this may seem counter-intuitive to founders who want to get into the ‘assessment queue’ as soon as possible, in our experience these rushed applications take far longer to reach the decision phase.

6. The Narcissist

Financial regulators have a finely honed ‘sixth sense’ for identifying businesses that are likely to be problematic from a supervisory perspective. One of the most obvious signs that a company will be difficult to work with as a regulated entity is when one or more directors refuse to consider constructive criticism or expert advice because it is contrary to their personal beliefs.

Long-term relationships require compromise by both parties, and crypto firms should take care to demonstrate that they are committed to continuous improvement and achieving industry best practices. This self-awareness should be reflected in all communications and interactions with the regulator. If you give the impression of being arrogant or hostile to any suggestions for improvement, the assessor will probably view your application as a lost cause.

7. The Beggar

Financial resources are a key component of any regulatory authorisation. Depending on the jurisdiction, your crypto firm may not be required to have a minimum level of capital adequacy to apply for a licence. However, this does not mean that your company’s finances are not going to be seriously assessed.

Start-up crypto firms with no sources of revenue outside of investment funding must be prepared to justify the assumptions made as part of any financial modelling. They will also need to demonstrate that they have sufficient funds to meet ongoing expenses while waiting for regulatory approval. This is one of the biggest challenges faced by CFOs and is something that should always be carefully analysed and addressed as part of the regulatory business plan.

8. The Slob

In their rush to meet internal deadlines, many businesses submit applications that are riddled with inconsistencies, missing information, typos, and grammatical errors. Crypto firms would do well to remember that you only get one chance at a first impression and submitting an untidy or low effort application will almost certainly lead to failure.

It is easy to forget that an actual human being will be assigned to assess your application. As painful as it may have been for your company to prepare the application, spare a thought for the person who actually has to read and analyse the documents you’ve submitted.

We recommend that firms include sufficient time in their project plan for a comprehensive review of the draft application and supporting materials. This exercise is best done by one person to ensure that the final product is cohesive and consistent.

9. The Outsider

Businesses that do not have an established presence in the jurisdiction where they are applying for authorisation will be viewed as higher-risk applicants by the regulator. Overcoming outsider bias is certainly possible, but it requires strategic planning and a demonstrated commitment to the jurisdiction.

Regulators are tasked with overseeing the integrity of their financial markets and looking out for the best interests of investors within their borders. New market entrants should be prepared to explain how they will integrate into the local financial ecosystem. This includes areas such as the timeline for establishing a physical office, appointing resident directors, hiring local employees, providing dedicated customer support, etc.

Where such decisions hinge on the actual attainment of the regulatory authorisation, it is sufficient to explain in your application how you are preparing to be regulated. Examples include meeting with local NED candidates, completing training on local directors’ duties, scoping out possible office locations, onboarding with professional services providers, etc.

Key Takeaways

Every month that your licence application is sitting on the assessor’s desk costs your business money and opportunities for growth. To avoid wasting time and effort, crypto firms should do everything within their power to show the regulator that they are ready to commit to a long-term relationship.

While it may not seem like it to companies who are deep in the application process, regulators truly do want to foster innovation in financial services. Firms should take heart from the fact that most of the mistakes we have described in this article can be easily prevented with strategic planning and a solid regulatory business plan.