Early this year the FCA consulted on change to the Appointed Representatives regime because of concerns about harm to consumers and the market. The FCA have recently published their feedback on the consultation responses and their final proposals for Appointed Representatives (AR) and their Principal firms. These FCA new proposals will come into effect on 8 December 2022.
Currently there are 3,400 Principles regulated by the FCA with around 37,000 Appointed Representatives (ARs) under them. ARs account for more complaints by value under Financial Services Compensation Scheme (FCSC) than those directly authorised and the FCA believe this supports the FCA’s intervention. At the same time the FCA acknowledge that the AR regime has benefits including increasing customer choice and providing a cost-effective solution to regulatory compliance.
The FCA want to achieve several outcomes from their reforms including:
- Principal firms better understanding their responsibilities for their Appointed Representatives (ARs) and improving their oversight of them.
- The FCA to have a better ability to challenge the appointment of an AR by a Principal
- Principals actively addressing issues with their ARs that have the potential to cause harm to consumers or the market.
- Consumers having better access to information about a Principal or an AR.
The FCA are going to proceed with the reforms outlined in their consultation as they were broadly supported by stakeholders. It is worth noting that a small number of stakeholders suggested that the Appointed Representative regime should be phased out, but this would require primary legislation to achieve and at the moment the FCA appear not to be in support of doing this. The FCA are committed to working with HM Treasury who are separately reviewing the AR regime and may in time make some more significant changes beyond those the FCA are currently undertaking.
The changes to the Appointed Representatives regime will come into effect after a 4-month implantation period on 8 December 2022.
2. The Changes to the Appointed Representatives Regime
The FCA are making a number of key changes to the Appointed Representatives Regime as follows:
- Principals to notify the FCA of future AR appointments 30 days before they take effect.
- Within 60 days of the new rules coming into force Principals firms must provide information in their existing ARs.
- Principals will need to provide more information on their ARs businesses including the nature of their regulated activities.
- Principals to provide complaints data and revenue information for their ARs on an annual basis.
- The FCA will publish on the Register the nature of the regulated activities a Principal permits its AR to carry out.
- Principals will be required to inform the FCA if they are carrying out Regulatory Hosting services.
- Principles to apply enhanced oversight of ARs, take more effective responsibility for them and annually review the activities they carry out.
Information and Notification Requirements
The current information requirement on Principals is quite limited so the FCA are increasing the amount of information that is required to be submitted about an AR. The additional information will be:
- The Primary reason for the Principals intention to appoint an AR.
- The nature of the regulated activities the Principal will permit the AR to undertake and in which markets.
- Whether the AR will provide services to retail clients.
- Whether the AR is part of a group and if so the group’s name.
- Whether any individual from the AR will be seconded or contracted to the Principal and the rationale for doing this.
- Whether the AR was previously on AR for a different Principal and why the relationship was terminated.
- Information on the financial arrangements between the Principal and the AR
- Nature of the ARs non-regulated business and the proposition of it in relation to its regulated business.
- Anticipated revenue in the first year from regulated and non-regulated business.
Principals will have to report any changes to the above information withing 10 business working days.
Pre-notification of new AR Appointments
Principals will be required to make pre-notifications to the FCA of AR appointments 30 days in advance. The 30-day period will not be in addition to the 3-month notification period for Approved Person and these applications will be carried out concurrently.
Data about the AR will need to be provided to the FCA via a Section 165 data request, which the FCA believe will make the process less burdensome for Principals. The ARs details will be required to be verified to the FCA annually in writing by the Principal within 60 days of the accounting reference period. Details of the AR will be included on the Register, but the FCA will make it clear about the Principal’s responsibility for the AR, so consumers are better informed about the individual firm and their relationship. Principals will be expected to collect data on their Ars, including revenue for both regulated and non-regulated activity. Where a firm is both an AR and has limited permission Consumer Credit approval the activities will have to be reported separately.
Responsibilities of Principals and the FCA’s Expectations
Principals will have to ensure when an AR performs a function or task for them that there is not a conflict of interest. They will also have to have ‘appropriate safeguard’ in place to ensure this. Principals will also have to assess that an AR is ‘Fit and Proper’ and has the competence and capability to carry out the activities the Principal has permitted. Further Principals will also have to take ‘reasonable steps to ensure their ARs are acting within the scope of their appointment. This will need to be carried out annually. The FCA believe many Principals are already doing this.
Principals will be required before appointing an AR to ensure they have ‘adequate controls’ over the AR to be able to monitor and enforce compliance. Principals must regularly assess the adequacy of controls and ensure if the AR grows it can still adequately monitor it. Principals will be expected to recognise risks and be able to limit harm from an AR. Principals will be expected to terminate an AR relationship if they are no longer able to have a proper oversight of an AR particularly if it has grown too large. An AR must be overseen to the same level as a Principal’s own employees.
3. POTENTIAL FURTHER CHANGE TO THE APPOINTED REPRESENTATIVES REGIME.
The FCA as part of their consultation had a discussion section asking for views on the future of the AR regime. This ran in parallel with the HM Treasury Call for Evidence on the regime. A number of areas of the regime FCA asked about included:
Consultation respondents generally agreed that there is potential harm from the Regulatory Hosting model, and it is often associated with poor oversight. There was thorough support for the model as it gives cost-effective access to financial regulation.
Smaller Principals with larger ARs
There was concern raised by respondents where a Principal could be financially reliant on a much larger AR, and it was suggested that a threshold could be set for the size of an AR. However, there was some support for smaller Principals arguing that they often have closer links with their ARs and can be more innovative and reactive than a large Principal.
There were strong arguments that only UK based ARs should be allowed. This was based on the risks and challenges of oversight for overseas ARs which included having to deal with overseas jurisdictions and law and well as communications issues.
Enhancing Prudential Standards for Principals
Most respondents agreed there should be new prudential requirements for Principals and their ARs, this though should be looked at in the wider regulatory context rather than in isolation.
The NFDA awaits the findings of the HM Treasury Call for Evidence.
For further information please contact the NFDA on 01788 538303 or email email@example.com.