Incoming changes to the FCA’s Appointed Representative Regime
In August 2022 the Financial Conduct Authority (FCA) published a policy statement titled: Improvements to the Appointed Representatives regime in relation to its Consultation Paper 21/34. The FCA’s purpose in publishing this policy statement is to address concerns over potential failures in the due diligence of authorised firms when selecting Appointed Representatives (ARs) and the subsequent lack of oversight of ARs.
The changes result, in part, from the Parliamentary inquiry into Greensill Capital, which concluded that the FCA and HM Treasury “should consider reforms to the appointed representatives regime, with a view to limiting its scope and reducing opportunities for abuse of the system”. They will take effect on 8th December 2022 after a four-month implementation period, with the FCA providing transitional arrangements to allow additional time for firms to comply and familiarise themselves with the changes.
The evolution of ARs
The AR regime was established by the Financial Services Act 1986, with the view to regulate the operation of “investment business”. The use of ARs evolved and latterly was incorporated into section 39 of the Financial Services and Markets Act 2000 (FSMA 2000).
ARs are defined as a person who is party to a contract with an authorised person (a principal) which allows that person to carry out a regulated activity. Importantly, it is the principal who accepts responsibility for the actions of the AR and so is accountable to the FCA. The general concern is that ARs potentially are not directly accountable to the FCA.
FSMA 2000 allowed for the regulated activities carried out by ARs to broaden, to bring it in line with evolving market trends. However, the AR regime has gone beyond what was originally envisaged and, arguably, has led to some abusing the regime where they might otherwise be better suited to being fully authorised by the FCA pursuant to Part 4 A of FSMA.
The FCA has outlined its concerns in its Consultation Paper, including:
- Principals not having a reasonable understanding of their responsibilities for their appointed ARs; this can cause ARs to provide spurious information to consumers.
- Principals only provide the FCA with information on the market that the AR operates in, without having to detail the full extent of activities undertaken by the AR.
- Complaints data only being recorded against the principal and not the AR. This makes it harder for the FCA to identify whether certain ARs are accumulating a disproportionate number of complaints against them.
Key changes as stated in FCA’s Policy Statement
Notification requirements for ARs
- The pre-notification period for principals to notify the FCA of new AR appointments will be reduced from 60 calendar days to 30.
- Principals are to provide more information on the work undertaken by their ARs, including the type of regulated activities the ARs will undertake.
- Within 60 days of rules coming into force, principals must provide information on their existing ARs.
- Principals are to provide complaints data and revenue information for ARs annually. Principals have been given more time to report AR complaints and revenue data, from up to 30 business days after the principal firm’s accounting reference date, as proposed, to up to 60 days.
Data collation on ARs
- Principals will have to submit revenue data for each of their ARs annually and split by revenue from regulated and non-regulated activities. Revenue from non-regulated activities is to be provided to the nearest £5,000 and is to be split between revenue from non-regulated activity which is non-financial and non-regulated activity which is financial in nature.
- The FCA have provided the following definition for non‑regulated activities as: “Any activity that is not a regulated activity.”
- Whereas a non‑regulated financial services activity is: “Any activity of a financial nature but that does not involve the person carrying on regulated activity. This includes, but is not limited to, activities relating to investment services; insurance; pensions; banking; lending…etc.”
- Principals will need to indicate whether retail clients will have services provided to them by ARs.
- If an AR previously has been an AR to a different principal, this will have to be notified to the FCA, along with the reason for why the previous relationship terminated.
- Identify if there will be secondment or contracting of any individuals from the AR to the principal firm and if the individual(s) are to carry on “portfolio management and/or deal activities”. Where that arises, the principal firm will be required to explain the rationale for that arrangement.
Responsibilities of principals over ARs
- Principals will be expected to improve their level of supervision over ARs, safeguarding the “adequacy of systems and controls”.
- Take greater responsibility for their ARs. That should include increased on-going “monitoring” and an assessment of the “risk of harm to consumers as well as market integrity”. In short, a principal must ensure proper oversight of its AR(s) and ensure the AR (and its personnel) meet a “comparable standard” to the principal’s own employees.
- Annually review information on ARs’ activities, which would include: the suitability of senior individuals at the AR and their ability to carry out regulated activities; the AR’s financial position; and whether the principal has sufficient tools at their disposal to be able to successfully supervise the AR.
- To prepare a self-assessment document annually to cover how the principal meets the FCA’s requirements of the policy.
Principals can, and in fact are, encouraged by the FCA to carry out annual reviews of their ARs. The FCA proposes those are undertaken by responsible individuals within the principal with a “suitable degree of knowledge and authority” below the governing body’s level. It concluded that significant issues which are identified at specific ARs must be escalated to the AR’s and principal’s governing body.
The FCA suggests an element of assessment should focus on how the principal is meeting its duties in relation to its ARs. In essence, this is intended to be a risk-gap analysis of the responsibilities of a firm as a principal which must be reviewed and approved by the principal’s governing body annually, as a minimum requirement.
AR(e) you ready?
The proposals will result in a significant step-change in approach, such that the route to becoming an AR is not as quick and easy as many currently perceive is the case. This is particularly true where principals may be less inclined to take on ARs due to the enhanced checks and reporting requirements associated with the new regime and could, therefore, threaten to undermine the AR system entirely.
Further, principals will incur time and cost to ensure the AR (and the principal) complies with enhanced requirements. Principals surveyed by the FCA noted that they already hold some of the information that the FCA is asking for principals to now report. However, it is the element of reporting the data which may prove to be expensive and onerous on the principal.
Despite apparent criticism of the AR regime, the FCA’s efforts in modernising and attempts to hold the system to a higher level of accountability show that the AR regime is here to stay, so make sure you AR(e) ready for the incoming changes.
Sasha Rusakova, Assistant Solicitor/ September 2022