COND 2.7 Business model

1Paragraph 2F of Schedule 6 to the Act sets out the business model threshold condition for firms carrying on, or seeking to carry on, regulated activities which do not include a PRA-regulated activity.

2For the purposes of paragraph 2F(3) of Schedule 6 to the Act, relevant credit activity is defined in paragraph 2G of Schedule 6 to the Act. Guidance on the meaning of relevant credit activity is given in COND 1.1A.5A G.

1Paragraph 3E of Schedule 6 to the Act sets out the business model threshold condition which is relevant to the discharge by the FCA of its functions under the Act in relation to firms carrying on, or seeking to carry on, regulated activities which include a PRA-regulated activity.

1The guidance in COND 2.7 should be read as applying to both paragraph 2F of Schedule 6 to the Act and, as far as relevant to the discharge by the FCA of its functions under the Act in respect of firms carrying on, or seeking to carry on, a PRA-regulated activity, paragraph 3E of Schedule 6 of the Act.

1Firms carrying on, or seeking to carry on, a PRA-regulated activity, should note that the PRA states in its Approach Documents that analysis of such firms' business models will form an important part of the PRA's supervisory approach. For the avoidance of doubt, this guidance does not apply to the PRA's own assessment of the firms' business models.

1In assessing whether the threshold conditions set out in paragraphs 2F and 3E of Schedule 6 to the Act are satisfied, the FCA may consider all matters that might affect the design and execution of a firm's business model, taking into account the nature, scale and complexity of a firm's business.

1In deciding how they will satisfy and continue to satisfy the threshold conditions set out in paragraphs 2F and 3E of Schedule 6 to the Act, firms should consider matters including (but not limited to) the following:

1. (1)

   the assumptions underlying the firm's business model and justification for it;

2. (2)

   the rationale for the business the firm proposes to do or continues to do, its competitive advantage, viability and the longer-term profitability of the business;

3. (3)

   the needs of and risks to consumers;

4. (4)

   the expectations of stakeholders, for example, shareholders and regulators;

5. (5)

   the products and services being offered and product strategy;

6. (6)

   the governance and controls of the firm and of any member of its group (if appropriate);

7. (7)

   the growth strategy and any risks arising from it;

8. (8)

   any diversification strategies; and

9. (9)

   the impact of the external macroeconomic and business environment.

1Firms should consider the manner in which they intend to bring their business model into operation. This plan could, for example, include matters such as procurement, outsourcing, and recruitment.

1Firms should consider scenarios which may negatively impact on the firm's business model with a view to ensuring the sustainability of the firm and, further, to consider the vulnerability of the business model to specific events and the risks and consequences that might arise. Where appropriate, this might include reverse stress-testing4. A firm should put in place a credible plan to minimise the risks that it identifies from, or in relation to, its business model and a contingency plan for dealing with risks that have crystallised.

1Firms should ensure that any adjustments to its business model:

1. (1)

   are approved at an appropriate level in the business;

2. (2)

   are considered in the light of any potential risks, impacts and consequences of the proposed changes; and

3. (3)

   appropriately take into account the needs of and risks to clients and relevant consumers.

1The FCA's assessment of a firm's satisfaction of the3 threshold conditions set out in paragraphs 2F and 3E of Schedule 6 to the Act will not necessarily be limited to a firm's regulated activities if the FCA believes the firm's other business activities, if any, may impact on a firm's regulated activities.