What Is an Investment Firm?
An investment firm is a legal person whose regular occupation or business is providing one or more investment services to third parties, or performing one or more investment activities, on a professional basis. In the UK, investment firms are regulated under the Financial Services and Markets Act 2000 (FSMA) and the FCA Handbook, with prudential requirements set by the Investment Firms Prudential Regime (IFPR).
The term covers a broad range of business models: from boutique corporate finance advisers and wealth managers to algorithmic trading firms and institutional broker-dealers. This guide explains the authorisation process, key regulatory requirements and ongoing obligations for UK investment firms. In short: identify the exact permissions you need, hold capital of at least £75,000, £150,000 or £750,000 (or more if fixed overheads or K-factors are higher), nominate approved senior managers, and submit a complete application; the FCA then has 6 months to decide. For the full route, see our FCA investment firm authorisation guide.
Which Activities Require Authorisation?
The following MiFID investment services and activities require FCA authorisation:
- Reception and transmission of orders: receiving a client's order to buy or sell a financial instrument and transmitting it to another firm for execution
- Execution of orders on behalf of clients: acting to conclude agreements to buy or sell financial instruments on behalf of clients
- Dealing on own account: trading against proprietary capital in financial instruments
- Portfolio management: managing portfolios of financial instruments on a discretionary, client-by-client basis
- Investment advice: providing personal recommendations to a client regarding transactions in financial instruments
- Underwriting and placing: underwriting financial instruments and/or placing them on a firm or best efforts basis
- Operating a multilateral trading facility (MTF) or organised trading facility (OTF)
Cryptoasset activities such as dealing, arranging and custody are not MiFID services; from 25 October 2027 they need separate FSMA authorisation under the new UK cryptoasset regime.
Ancillary services, such as safekeeping and administration of financial instruments, foreign exchange services related to investment services, and investment research, are not independently regulated but are subject to FCA rules when provided alongside regulated activities.
The Authorisation Process
Step 1: Regulatory perimeter analysis. Before applying, conduct a detailed analysis of your business model against the FCA's regulatory perimeter. Identify every regulated activity you will perform and the specific financial instruments involved. Common errors include underestimating the scope of "arranging" permissions or failing to identify advisory activities embedded within broader services.
Step 2: Business plan and financial projections. The FCA requires a comprehensive regulatory business plan covering your target clients, product range, distribution model, revenue projections and growth strategy. Financial projections, usually covering at least three years, must show the firm can meet its capital and liquidity requirements and remain solvent. The FCA will assess whether the business model is viable and sustainable without reliance on practices that could cause consumer harm.
Step 3: Governance and personnel. Identify individuals for Senior Management Functions (SMFs) under the Senior Managers and Certification Regime (SM&CR). Key SMFs for investment firms include: - SMF1 (Chief Executive) - SMF3 (Executive Director) - SMF16 (Compliance Oversight) - SMF17 (Money Laundering Reporting Officer)
Each SMF holder must be approved by the FCA and satisfy the fit-and-proper test. The FCA assesses honesty, integrity, competence, financial soundness and qualifications. Following PS26/6, in force from 24 April 2026, a firm has 12 weeks to submit an SMF application for someone covering an unexpected vacancy, and that person can continue while the application is decided.
Step 4: Compliance framework. Design and document your compliance monitoring programme, conflicts of interest policy, complaints handling procedures, financial promotions approval process, best execution policy and order handling arrangements. For firms conducting discretionary portfolio management, you will also need an investment management agreement template and suitability assessment framework.
Step 5: Capital and prudential requirements. Under the IFPR, determine your firm's classification: - Small and non-interconnected (SNI) firms: firms below specified thresholds (for example, assets under management below £1.2 billion, client orders handled below £100 million a day for cash trades, total annual gross revenue below £30 million, and no client money or client assets held) benefit from simplified prudential requirements - Non-SNI firms: larger firms must calculate capital requirements using K-factors
The permanent minimum capital requirement is:
| Firm type | Permanent minimum requirement |
|---|---|
| Does not hold client money or assets, does not deal on own account | £75,000 |
| Holds client money or assets, or operates an MTF, but does not deal on own account | £150,000 |
| Deals on own account or underwrites on a firm commitment basis | £750,000 |
Step 6: Submit the application. Applications are submitted via the FCA's Connect system. Include all supporting documentation: business plan, financial projections, compliance manual, governance map, SMF applications, capital adequacy calculations and specimen client agreements. The FCA must decide a complete application within 6 months and any application within 12 months of receipt. A complete, well-evidenced pack keeps the assessment within the 6-month period.
The Investment Firms Prudential Regime (IFPR)
The IFPR, effective since 1 January 2022, replaced the previous prudential framework for MiFID investment firms. Key elements include:
Own funds requirement: The own funds requirement is the highest of: - The permanent minimum requirement (£75k / £150k / £750k) - The fixed overheads requirement (one quarter of annual fixed overheads) - The K-factor requirement (for non-SNI firms)
K-factors: K-factors measure the risk of harm from a firm's activities across three categories: - Risk to Client (RtC): K-AUM (assets under management), K-CMH (client money held), K-ASA (assets safeguarded and administered), K-COH (client orders handled) - Risk to Market (RtM): K-NPR (net position risk) or K-CMG (clearing margin given) - Risk to Firm (RtF): K-TCD (trading counterparty default), K-DTF (daily trading flow), K-CON (concentration risk)
ICARA process: All investment firms must conduct an Internal Capital Adequacy and Risk Assessment (ICARA): an ongoing process to identify, monitor and manage risks to the firm, its clients and the market. The ICARA must assess whether the firm's own funds and liquid assets are adequate, considering both normal and stressed conditions.
Remuneration: The IFPR introduces remuneration requirements including a ratio between fixed and variable pay, deferral of variable remuneration for material risk takers and clawback provisions. SNI firms benefit from some exemptions.
Client Money and Assets (CASS)
Investment firms that hold client money or custody assets must comply with the FCA's Client Assets sourcebook (CASS). This is one of the most operationally complex areas of regulation and a frequent source of enforcement action. Key requirements include:
- Segregation of client money from the firm's own funds
- Reconciliation of client money balances on each reconciliation day
- Acknowledgement letters from banks and custodians confirming the client money/asset status
- A CASS resolution pack to facilitate orderly return of client assets if the firm fails
- Annual CASS audit by an independent auditor
Conduct of Business Requirements
Suitability and appropriateness: Firms providing investment advice or discretionary portfolio management must assess the suitability of each recommendation or investment decision for the individual client, considering their knowledge and experience, financial situation, investment objectives and risk tolerance. Firms providing execution-only services must assess appropriateness (a lighter test).
Best execution: Firms must take all sufficient steps to obtain the best possible result for clients when executing orders, considering price, costs, speed, likelihood of execution and settlement, size, nature and any other relevant consideration. Firms must maintain an order execution policy, monitor execution quality and be able to show clients how they achieve best execution. The FCA removed the annual top five venues report (RTS 28) from 1 December 2021.
Conflicts of interest: Firms must identify, prevent or manage conflicts of interest that could adversely affect clients. A written conflicts of interest policy must be maintained and disclosed to clients where conflicts cannot be fully prevented.
Common Application Pitfalls
- Underestimating capital requirements, particularly the fixed overheads requirement, which may exceed the permanent minimum
- Inadequate compliance resources: the FCA expects compliance to be properly resourced and not treated as a part-time function
- Weak business plans: overly optimistic revenue projections or business models dependent on a single client or revenue stream
- SM&CR gaps: failing to identify all required SMFs or appointing individuals who do not meet the fit-and-proper standard
- CASS readiness: firms planning to hold client money or assets without adequate operational infrastructure for CASS compliance
Regulatory Outlook
The FCA continues to refine the IFPR framework and has published several consultations on detailed rules. Key areas of development include: - Refinement of K-factor calculations for specific business models - Enhanced disclosure requirements for larger investment firms - Integration of sustainability risk into the ICARA process - Potential changes to the boundary between SNI and non-SNI classification
Firms should monitor FCA publications and engage with consultations to ensure they are prepared for evolving requirements.
Frequently asked questions
The permanent minimum capital requirement ranges from £75,000 (for firms that do not hold client money/assets and do not deal on own account) to £750,000 (for firms dealing on own account). However, the actual requirement may be higher if the fixed overheads requirement or K-factor requirement exceeds the permanent minimum. Firms should calculate all three components to determine their actual capital obligation.
Small and non-interconnected (SNI) firms are those below specified thresholds, including assets under management below £1.2 billion, client orders handled below £100 million per day and on/off balance sheet total below £100 million. SNI firms benefit from simplified prudential requirements, including exemption from K-factor calculations and reduced remuneration and disclosure obligations.
The FCA must decide a complete application within 6 months, and any application within 12 months of receipt. The 6-month clock runs from when the FCA treats the application as complete, so a full pack with a clear business plan, capital calculations and approved-person forms is the best way to keep to that timetable.
A core SM&CR firm typically needs a Chief Executive (SMF1), Executive Directors (SMF3), a Compliance Oversight function (SMF16) and a Money Laundering Reporting Officer (SMF17), plus a Chair (SMF9) or Partner (SMF27) where relevant. One person can hold more than one role where that is appropriate.
No. Small and non-interconnected firms meet the higher of the permanent minimum requirement and the fixed overheads requirement. They must still run an ICARA process and hold at least one third of their fixed overheads requirement in liquid assets.
Definitive guides on this topic
The permanent reference pages this article relates to.