Is the Regulator Ghosting Your Licence Application?
Written by Tiana Whitehouse, Founder & Managing Director at SWOT Team Consulting
In our highly digital age, most of us have experienced ‘ghosting’ in one form or another. While most people tend to associate the term with online dating or an acquaintance that just disappeared into thin air, we have increasingly seen anecdotal evidence that the phenomenon is creeping into professional and bureaucratic situations. This includes the lengthy and fraught process of seeking crypto regulatory authorisation(s).
There are many ways in which the process of applying for a regulatory licence can be likened to courtship. Both scenarios are nerve-wracking, confusing, expensive, and come with a low probability of long-term success. And yet, just as digital matchmaking services continue to be wildly popular, there has been a veritable explosion in the number of crypto start-up businesses seeking official long-term relationships with regulators.
Expectations v. Reality
Many crypto firm founders do not have realistic expectations of what the regulatory licensing process will require of them before diving head-first into the deep end of the pool. The most common mistake we see is where founders fail to develop a regulatory business plan and align it with their strategic objectives. This leads to unrealistic timelines for obtaining crucial authorisations, over-ambitious expansion plans, and wildly inappropriate financial projections.
A stalled licence application can literally kill a business as cash reserves dwindle and product launches are endlessly delayed along with crucial revenue streams. Founders find themselves unable to meet critical milestones in their business plans and subsequently miss out on key funding rounds and strategic hires. While some delays should always be expected and planned for, many applicants are missing out on the subtle and early signs that a rejection is inevitable.
A crucial (and yet often overlooked) issue is the reputational damage that comes with a failed licence application. Many leaders do not realise that they must disclose a rejected or withdrawn application to other regulators and their key business partners. This reputational damage can negatively impact the outcome of licence applications in other jurisdictions, scare away institutional investors, and may later be identified as the catalyst of the company’s ultimate demise.
The Current State of Affairs
Founders should be realistic when calculating the opportunity costs and significant financial resources that will be required in the quest for regulated status. Before the pandemic, the industry rule of thumb for completion of a licence application project used to be around six (6) months for a ‘good’ applicant (i.e., no major changes required to the business model or products and minimum standards already being met internally). Now, however, it is not uncommon to hear of applicants who have waited for eighteen (18) months before finally receiving an unfavourable decision on their application.
A multitude of factors are responsible for the unprecedented increase in assessment times, the most obvious of which are pandemic-related delays in planned crypto policy changes, a severe shortage of regulatory staff who are experienced in DeFi and crypto products, and policy makers who are unwilling to commit additional budgetary resources to regulatory agencies while still expecting them to service a population that has massively increased in size over the last two years.
The mounting problems faced by financial markets regulators cannot be understated. One prominent example is the UK’s Financial Conduct Authority (FCA), who had to engage the services of law firms and consultants to help ease the backlog of crypto authorisation applications after facing widespread criticism about assessment delays. This is an expensive and unsustainable solution. The looming 31 March 2022 end date of the Temporary Registration Regime (TRR) for existing UK cryptoasset businesses is surely a source of significant stress to both the FCA and the applicants who are anxiously awaiting a decision.
Fear of Commitment
In addition to the burnout that comes with being oversubscribed and under-resourced, financial regulators can be a rather jaded bunch. Their reluctance to grant authorisations to crypto firms boasting of their disruptor status and revolutionary ideas can be linked to past experiences with market disruptors in the derivatives space. High risk business models require a disproportionate amount of regulator time, supervisory resources, and funds. They also pose an undue risk of harm to retail investors and the stability of financial markets.
Nevertheless, regulators have certain legal obligations to licence applicants and do not have the luxury of simply ‘swiping left’ as soon as a red flag is spotted in an application. Assessment procedures must be carefully followed and meticulously documented in case of a later judicial review or other formal challenges by an unsuccessful applicant. When one does not have the luxury of dispensing with an applicant without first completing a great deal of complex assessment work, one must resort to more creative measures.
Some regulators have taken a mercenary approach to weeding-out potential suitors by conducting interviews with executive directors and key senior managers early in the application process as a way of quickly removing wholly unsuitable prospects from the pool. This is the regulatory version of revealing a potential ‘catfish’ before any serious effort is invested in the relationship.
In other jurisdictions, regulators with fewer resources or less inclination for direct confrontation have perfected the art of ghosting. The inevitable result of this strategy is a large pool of crypto suitors waiting endlessly for a commitment that just isn’t coming. Eventually, these companies will either end up insolvent or find themselves forced to exit the jurisdiction and try another regulator with lower standards.
Signs You’re Being Ghosted
Over time, regulators have developed a common patois and tactical playbook that often requires insider knowledge to interpret. Without the right expertise guiding a business through the application process, it can be very easy to misinterpret the intentions and strategy behind what appear to be standard regulator communications or requests for additional information.
We have compiled the following list of signs that your application could be on the ‘ghost’ list:
1. Increasingly lengthy periods before you get a response from your assessor.
You should start feeling some concern if you find yourself sending multiple reminder emails to your licence assessor before receiving a reply. While your assessor is most certainly dealing with an overload of work and many competing priorities, they still have their own internal KPIs to meet. A lack of urgency in completing the assessment of your application may indicate that the assessor does not view your business as a serious contender and is instead focusing their attention on other applications that have a better chance of a successful outcome.
2. Your application is bounced around between different assessors.
Sometimes this is down to plain bad luck due to personnel changes or your original assessor going on extended leave. However, it can also mean that your first assessor was unable to come to a decision on various components of your application and has escalated it to a more senior colleague. Regardless of the underlying reason, the new assessor will likely have to re-start the assessment from scratch.
3. You keep getting asked the same questions.
If you find yourself being asked the same questions over and over (albeit in slightly different wording), this indicates that your application and supporting documents are not clear and/or rife with inconsistencies. At this stage, we recommend requesting a meeting with the regulator to clarify your earlier responses and determine the best course of action to progress the application.
4. You receive multiple requests for information.
Requests for information are to be expected as part of any regulatory application. However, it is important to note that requests for further information allow the regulator to effectively ‘pause’ the assessment clock. The time that it takes for you to provide your responses is not tolled against any legislative requirements for the completion of the assessment.
While some regulators will give early feedback that your application is not yet complete or sufficiently detailed and urge you to withdraw it, others may rely on multiple and/or lengthy requests for information to buy themselves more time to make a decision. If you find yourself continuously receiving new requests, this may indicate that your assessor is using a staged approach as a way of pushing back the assessment deadline.
5. The bar keeps getting higher.
Regulators have a great deal of discretion to impose specific conditions as a pre-requisite for granting an authorisation (e.g., increased capital requirements, appointing local NEDs, official approval of a senior management candidate, etc.). If you find that you are being asked to agree to increasingly onerous conditions before a licence will be granted, this indicates that the regulator has serious concerns about your ability to comply with the legal requirements of the authorisation. It is not uncommon for the list of demands to reach a point where the business simply decides that it’s no longer worth continuing with the application process.
Key Takeaways
Crypto firms should be prepared to actively manage their relationship with the regulator and seek specialist expertise if they do not have the right internal capabilities to prepare the application and oversee its progress. It is especially crucial to include realistic timeframes and budget forecasts in the company’s regulatory business plan, as failure to do so is certain to lead to unfortunate outcomes.
Even in today’s challenging environment, it is still possible for a crypto firm to successfully obtain a regulatory authorisation in six (6) months with the right strategy and an excellent application. In our next article, we will discuss the top mistakes crypto firms make in their licence applications and how to avoid them.
Does your company need help with licensing applications? Get in touch with SWOT Team Consulting for a consultation.