In the first of two articles on Appointed Representatives, partner Tim Goodger considers changes impacting the appointed representative regime.
Recently the Financial Conduct Authority (FCA) published its views on the use of Overseas Appointed Representatives (OARs). It has asked that principals review their arrangements with any entities which they have appointed as an OAR and, in particular, consider whether or not those entities carry on any regulated activity in the UK which – in effect – is the basis for the appointment. If they do not, then the FCA is looking to have those entities de-registered as an OAR.
OARs and Brexit
Although there appears to have been a growth in the use of OARs generally, some of that is attributable to Brexit. OARs have been used effectively to enable groups to carry on dealing with reinsurance and insurance business from and within the EEA such as when an EU intermediary is either a subsidiary company of a UK intermediary or where the EU intermediary incorporates a subsidiary in the UK. Appointing the UK branch of an insurance or reinsurance intermediary incorporated and regulated in an EU State as the UK intermediary’s OAR enables the EU entity to conduct regulated activities in the UK, whether knowingly or not, such it does not fall foul of the general prohibition under FSMA 2000.
To an extent this model has arisen due to the FCA’s position to international firms set out in its paper ‘Our Approach to International Firms’, which presented various EU intermediaries with difficulties seeking full Part 4A permissions pursuant to FSMA 2000.
The FCA’s approach
The FCA has stipulated that principals need to ascertain whether the arrangements they have with their OARs remain appropriate and, if not, for a principal to terminate the relevant appointment and any associated contract. As necessary, a principal should notify the FCA of any termination of appointment or update the FCA regarding any changes. That aligns with a principal’s general reporting obligations. This may present some principals with potential contractual disputes and also present some OARs with problems resulting in the closure of an office in the UK. Some principals therefore may wish to revisit the wording of their arrangements or contracts to ensure they are able to terminate the appointment without being sued for consequential loss or damage.
Notably, the FCA has made clear the due diligence that it expects principal firms to undertake. Part of the detail required for any application for an AR should include establishing whether the AR has previously applied to the FCA for direct authorisation for Part 4A permissions and if the proposed AR withdrew its application because it could not meet the FCA’s regulatory standards.
Even where firms have disclosed that the proposed OAR applied but withdrew its application for Part 4A permissions, the FCA considers the proposed principal needs to make greater enquiry to see whether and how a proposed OAR has enhanced its business model or systems and controls to address the FCA’s original concerns, if any. The principal needs to address that when completing any application for an OAR. This suggests the FCA may be seeking to close the door for EU entities becoming OARs if they were unsuccessful in obtaining Part 4A permissions. This of course coincides with the FCA’s Temporary Permissions Regime coming to an end on 30 December 2023.
Notably, this latest position is in contrast with what the FCA had stated historically, being that there may be some scenarios where firms have valid reasons for not applying for full authorisation, including if they are becoming an appointed representative (AR) of a UK authorised person and intend to cancel their temporary permissions once the AR application is approved. By implication that meant entities could become OARs, with UK branches. On that basis, it is not clear therefore why the FCA is focusing on this area, over and above its usual concerns about a principal’s proper oversight of any appointed representative.
Overseas Persons Exclusion
Naturally, there is a question whether or not an EU entity needs to have branch in the UK and, if not, whether they could make use of the Overseas Persons Exclusion. They cannot do so however if they have an establishment in the UK. This generally places an overseas firm (but particularly Brexit vehicles of UK intermediaries, being third country intermediaries) in an invidious position. In part, because the Brexit vehicle likely is there to place EEA reinsurance and insurance business with the London branch of Lloyd’s Insurance Company SA (Lloyd’s own Brexit solution), or with UK branches of other EU reinsurers and insurers. That is particularly the case where there a policy is required for both EEA and UK risks, or even worldwide risks. Likely also, the EU entity seconds personnel from another company within the same group based in London, to assist the EU entity servicing its business.
The future
It is questionable whether the FCA should impose restraint on the use of a model which currently works well or whether it should adopt a more sympathetic approach to regulation of OARs to assist UK re/insurance intermediaries dealing with issues which have arisen from the EU’s approach to Brexit and there being no agreement under the Trade And Cooperation Agreement between the EU and UK in respect of financial services. Arguably, the insurance and reinsurance industry is receiving mixed messages which does not assist in planning business strategy.
Timothy Goodger , Partner specialising in insurance and reinsurance / December 2023
