Five pitfalls when applying for a regulatory licence

May 25, 2023
Nick Samson
Risk & Compliance Consultant

Companies, such as banks, pension funds, financial service providers, investment firms or payments institutions that want to offer financial services or products require a regulatory licence. But applying for a licence is not a simple process. It requires specialist knowledge and extensive preparation. In this article, we share five pitfalls in applying for a regulatory licence.

1. Applying for the wrong licence category

An incomplete or incorrect licence application may lead to a delay or even a rejection of the application. And that would be a shame, because a licence application always incurs costs – even if the application is rejected. That’s why it is important to find out in advance how to categorise the services you want to offer. Do they require a licence? And if so, what supervisory authority grants the licence? In The Netherlands, the AFM grants licences to financial service providers, fund managers and investment firms, among others. DNB is the licencing authority for payment institutions, trust offices, banks and insurers. You may also have to deal with both regulators, for example in the case of an investment firm. The licence must be applied for with the AFM, while shareholders with an interest of 10% or more must apply for a declaration of no-objection (DNO) from DNB.

2. Insufficient insight into the legal framework

To qualify for a licence, your organisation must meet certain legal requirements. But financial legislation is quite complex, which makes it difficult to get a complete overview of the applicable legal framework. The application forms do not cover all of the requirements. Without consulting a specialist in the field of financial supervision laws, you run the risk of overlooking requirements.

3. Organisational structure does not match licence category

As a licensed financial institution, you must meet all kinds of requirements. During the licence application, you must therefore provide the regulator with insight into your business processes and the way in which your organisation is structured. For this you must provide an organisation chart, in which all departments and structures are included. In this chart you must indicate in detail which persons oversee the departments and pay attention to the internal audit functions in particular. Also indicate which functions are outsourced and which persons may hold more than one position.

A lot can go wrong in this phase of the process. If the organisation chart is incomplete, this can raise questions with the regulator. Therefore, you should ensure that the structure of the organisation matches the license category. Also pay attention to strict requirements and mandatory functions.

4. Concealing antecedents during the assessment of the board

The policy makers and supervisory directors of a financial company must be suitable for the position that they want to hold. For that reason, an assessment needs to be performed by the regulator. Candidates will be assessed for their knowledge, skills and professional conduct. Among other things, the regulator will take into account the competencies, education and work experience.

The properness of all policy makers must be beyond doubt. The regulator will assess whether incumbent and prospective management and supervisory board members are fit to occupy their position and whether their propriety is beyond doubt.

Propriety testing focuses primarily on antecedents. The applicant will be charged heavily for concealing antecedents or the omission to report antecedents. Therefore, you should always report any events, even if you doubt their relevance.

5. Issues regarding the DNO application

For certain licence categories, shareholders who have an equity or controlling interest of at least 10% must be assessed by DNB. This is because the regulator wants to prevent parties that are not financially sound or not integer, from holding interests in financial companies. DNB requires a lot of information for this assessment. If DNB agrees, it will issue a declaration of no-objection (DNO). Applying for a DNO is complex and time-consuming. There are requirements regarding the capital position, the reliability and sometimes the suitability of the policymakers. To this end, financial figures of legal and natural persons, a business case and reliability test must be submitted to DNB. The figures may not be older than one year.

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