How does proportionality apply for new and simple firms?

It helps to separate two things that get blurred. Regulatory proportionality is where the rules themselves are simplified or reduced for certain categories of firm against prescribed criteria. Supervisory proportionality is where the intensity of oversight is scaled to the risk a firm poses. The first is largely predictable, because it follows defined thresholds. The second is a matter of supervisory judgement, and far less predictable.

So you can rely on regulatory proportionality, because it’s rules-based, but you can’t assume supervisory proportionality, because it depends on how the regulator reads your firm. A small firm doing something the regulator finds risky, in a sector under scrutiny, or with a weak control history, can attract attention out of all proportion to its size. Knowing which kind you’re dealing with on any given obligation tells you whether you can plan around a clear threshold or whether you have to make a judgement and be ready to defend it.

For an FCA investment firm, the most concrete piece of proportionality is the small and non-interconnected (SNI) firm category under MIFIDPRU. An SNI firm sits below a set of defined thresholds covering assets under management, client orders handled, the size of its balance sheet and its on- and off-balance-sheet items, and, critically, whether it holds client money or client assets. A firm that meets all the conditions is an SNI and gets a lighter regime: a simpler ICARA, reduced regulatory reporting, exemption from certain K-factor calculations, and lighter remuneration requirements.

This is regulatory proportionality at its cleanest, because the thresholds are defined and you can measure yourself against them. Two things catch firms out. First, the thresholds are tested on an ongoing basis, not just at authorisation, and several are measured on a combined or rolling basis. A firm that grows past a threshold doesn’t stay an SNI because it was one last year; it has to monitor its position, re-classify when it crosses, and manage the transition, because the heavier obligations don’t wait. Second, holding client money or assets at all takes a firm out of the SNI category for that limb regardless of size. That surprises founders who assumed small automatically meant simple. A boutique that starts holding client money has changed its regulatory category, and its proportionality with it.

For a new firm, proportionality starts before the rulebook, at the authorisation gateway. The FCA assesses every applicant against the threshold conditions in COND: adequate resources, fit and proper, a suitable business model, and the ability to be effectively supervised. Proportionality runs through how these are applied. A simple, low-risk business model is assessed against a lighter set of expectations than a complex one, but the burden is on the applicant to make the simplicity legible.

This is where new firms most often misjudge things. They assume that being small and simple speaks for itself. It doesn’t. The applicant has to articulate the business model, show that resources, governance and controls are proportionate to it, and demonstrate that the firm understands the risks it poses. A vague application invites the regulator to imagine complexity that isn’t there, which brings more questions, more conditions, and a slower, heavier authorisation than the business deserves. Present an accurate picture of a simple business with controls sized to match, rather than leaving the FCA to work it out.

Early engagement is part of this. A new firm that talks to the FCA early, explains its model, and asks where the regulator expects to see proportionate controls tends to have a smoother authorisation than one that submits a dense application and waits. At authorisation, the task is to make the firm’s simplicity legible and credible to the FCA.

It matters just as much to know where proportionality doesn’t apply, because the obligations that bind every firm regardless of size are the ones small firms most often underweight. The conduct rules, the Consumer Duty where retail clients are in scope, the requirement to treat clients fairly, the obligation to identify and manage conflicts under SYSC 10, the anti-money-laundering obligations, and the senior managers regime all apply to small firms. Their application is sensibly scaled, so a small firm needs fewer senior management functions than a bank, but the principles are not waived. A boutique still has to have someone accountable for compliance, still has to manage its conflicts, still has to meet its financial crime obligations.

The ICARA is the clearest example of scaled-but-mandatory. Even an SNI firm has to run one, assessing the harms it could cause and the resources it needs to wind down in an orderly way. The SNI version is lighter, but it isn’t absent, and a thin, boilerplate ICARA from a small firm reads as a finding, not as appropriate proportionality. The skill is in making the ICARA proportionate: short and focused because the business is simple, rather than thin because the firm didn’t do the work. Those two look different to a supervisor who reads it.

A small firm can’t build a full in-house compliance, risk and operations function, and proportionality doesn’t expect it to. One of the most useful levers a new or simple firm has is outsourcing: appointing an external compliance support firm, using a third-party administrator, outsourcing internal audit, or relying on specialist advisers for areas it can’t cover itself. The FCA accepts this. SYSC 8 explicitly contemplates outsourcing, including of critical or important functions, provided the firm manages the arrangement properly. For a six-person manager, outsourcing the things that don’t need to be in-house is how proportionality is meant to work.

Under SMCR, a firm can outsource the compliance function but not accountability for it. Under the senior managers regime, a named individual stays accountable for compliance, for financial crime, and for the firm’s overall control environment, regardless of how much of the underlying work a third party performs. The regulator expects the firm to oversee its providers, understand what they do, keep enough internal competence to challenge them, and be able to keep meeting its obligations if a provider fails. A firm that outsources compliance still owns oversight of it; treating it as someone else’s job creates an accountability gap. The proportionate answer is to outsource the work, keep the oversight, and make sure the accountable senior manager understands and supervises what the providers deliver.

There’s a tendency to think the only risk in proportionality is under-doing it: building too little control and getting caught short. That’s the more dangerous error, but over-doing it costs too, and for a small firm the cost can decide viability. A boutique that imports a global bank’s policy suite, runs governance committees it doesn’t need, and produces a hundred-page ICARA for a simple business is spending scarce resource on controls that don’t match its risks, and often doing it badly, because the documents are borrowed rather than understood. Over-compliance wastes scarce resource and often coexists with gaps in the controls that matter.

The proportionate firm spends its limited compliance resource where its actual risks are, and is comfortable being light where the business is simple. That’s harder than it sounds, because it requires the firm to understand its own risk profile well enough to make the judgement and defend it. But it’s the point of proportionality: right-sized compliance, evidenced by a clear-eyed assessment of what the firm does and the harm it could cause. A small firm that can show it thought carefully about where to invest and where to be light is demonstrating the judgement the regime wants to see.

Where the SNI regime and scaled supervision lighten the load, and where the obligation stays whole whatever the firm’s size.

The part of proportionality a firm can’t control by qualifying for a category is how intensively the regulator chooses to supervise it. This is where track record, conduct history and sector matter, and where a small firm can find itself getting attention that feels out of proportion to its size. A boutique in a sector the FCA is scrutinising, or one that has had a control failure, or one whose returns or notifications have raised questions, will draw more supervisory engagement than a comparable firm with a clean record. Supervisory intensity tracks conduct and track record, not size.

You influence this by being the kind of firm that is straightforward to supervise: accurate, timely regulatory reporting, prompt and candid notifications when something goes wrong, governance that demonstrably works rather than existing on paper, and a compliance function that engages constructively. Supervisory intensity responds to conduct history, not SNI status alone. Supervisory proportionality is earned through accurate reporting, prompt notifications and demonstrable governance over time.

Take a founder setting up a discretionary investment manager for professional clients: no client money, modest assets under management, a team of six. The instinct is to apply for authorisation, tick the small-firm boxes, and expect a light regime to follow automatically.

A firm that frames and evidences its proportionality is treated differently from one that assumes it. Before applying, it runs a self-assessment of its own characteristics: its size, the simplicity of its strategy, the fact that it holds no client money, and the limited harm it could cause clients and markets. It uses that to confirm it qualifies as an SNI and to size its controls. In the application it presents the picture plainly: the business is simple, the risks are these specific ones, the controls are sized to match, and here is the ICARA that evidences it. It engages the FCA early to confirm the regulator agrees with that read. And it builds a monitoring process, so that if assets grow past an SNI threshold, or the firm ever moves to hold client money, it knows at once that its category, and its obligations, have changed.

A firm that hasn’t evidenced its proportionality can spend months of extended authorisation earning it.

This insight is provided for general informational purposes only and doesn’t constitute legal, investment, or regulatory advice.