FCA to address oversight of appointed reps

FCA to address oversight of Appointed Reps

The FCA pointed to “a wide range of harm across all sectors where firms have ARs” in launching its consultation on the use of appointed representatives last month. The regulator’s proposals to address this will increase the regulatory burden for principals and appointed representatives alike. Although the FCA seems to remain supportive of the regime, those with senior roles at principal firms will need to be prepared to up their game. 

FCA consultation on appointed representatives 

The FCA’s consultation paper: CP21/34: Improving the Appointed Representatives regime was launched in December and closes on 3rd March. According to the regulator: “…the level of harm we are currently seeing is too high. There are real risks of consumers being misled and mis-sold with little scope for recourse”. 

It’s not the first sign of a clamp down on appointed representatives. We have seen increasing enforcement action from the regulator over recent years and a spate of warnings from Dear CEO Letters to multi-firm reviews. 

What are appointed representatives? 

The appointed representative and tied agent regimes enable firms to carry on regulated activities under the supervision of a directly regulated ‘principal’ firm without the need to go through the costly and time consuming FCA authorisation process. Under a written agreement, the appointed representative – or AR – acts as the agent of the principal firm, which takes full responsibility for ensuring that its ARs comply with the FCA’s rules and is accountable for any infractions committed by the ARs to which it stands as principal. 

In the FCA’s words, the AR regime was originally created “to allow self-employed representatives to engage in regulated activities without having to be authorised”. Over time, it has evolved to include a wider range of business models across sectors and markets. Some feel this has gone too far and it has become a ‘back door’ to carrying out regulated activity. 

Adequate oversight of appointed representatives has long been an area of concern for the FCA, particularly where the principal is not in the same business as its ‘representative’ and does not perform enough due diligence to really understand the risks in its business. 

It’s not all doom and gloom for appointed representatives and their principals 

While the FCA has identified significant issues with the current AR regime, it also continues to acknowledge its benefits. The regulator elaborates on these benefits in the recent consultation paper, highlighting the following positives:  

  • The regime is a cost-effective way to comply with regulation 
  • It supports the FCA’s engagement with firms, enabling amplification of its messages 
  • The model allows more participants in the financial market which can support effective competition 
  • It provides a platform to trial new services 
  • [Where principals exercise high-quality oversight and monitoring of their ARs] it ensures good outcomes for consumers and markets. 

The FCA’s aim is to address the harm in the market while retaining the cost, competition and innovation benefits that the AR model provides. The proposed reforms, according to the regulator will all it to “more easily identify potential risks within principals and ARs” and “better assess whether the principal has the expertise, systems and controls to effectively oversee its ARs.” 

The AR regime was established with a particular purpose in mind, but innovation has expanded it to a position where the regulator feels it required review. While there are many principals who fully comprehend their obligations and run robust operations, unfortunately there are too many examples where ARs have not been properly supervised. The recent Grensill Capital Case has led to a number of uncomfortable questions for the FCA around AR governance and a reform of the AR regime was part of the Treasury Select Committee’s recommendations. 

Implications of the FCA AR consultation for principals 

At the heart of the consultation paper is the view that principals are failing to conduct sufficient oversight and adequate due diligence on their ARs. The changes require principals to provide the FCA with more information on their ARs and more evidence of effective oversight.  

The two main areas of focus are: 

Information and notification requirements 

  • Verification of AR details 
  • Details of AR activities that the principle is taking responsibility for on the FS register 
  • Complaints data 
  • Revenue information for ARs.

Strengthening responsibilities and expectations of principals 

  • Annual review of AR senior management’s fitness and propriety 
  • Competence and capability 
  • Ensuring ARs have sufficient resources 
  • Monitoring appointed representative growth 
  • Effectively recognising, and limiting, the risk of harm 
  • Annual review of AR’s activities and business 
  • Termination of AR contracts and winding down. 

Implications of the FCA AR consultation for appointed representatives 

Although the new requirements fall firmly into the laps of firms acting as principal, the increased necessity to provide information and submit to rigorous oversight will have a knock on effect on the appointed representatives themselves. Whatever the outcome of the consultation, there is likely to be increased scrutiny of business plans and operations, increased lead times for AR onboarding, and ultimately increased costs of doing business. 

A closer alignment with SMCR? 

Inevitably the greater focus on governance and oversight when it comes to appointed representatives means greater accountability of senior managers at principal firms. 

Based on the areas highlighted by the FCA within the paper there is clear cross over between the SMCR requirements and some of the themes identified for scrutiny for ARs, especially around fitness, propriety, competence and capability.  

Although SMCR is not directly mentioned in the consultation paper, it’s fair to expect that senior managers will be required to include AR oversight within their job roles and responsibilities. 

Getting ready for the changes to the AR regime 

While the paper points to significant issues within the appointed representatives regime, it does not signal a death knell. Those principal firms who take their responsibilities seriously when it comes to understanding and overseeing their representatives should not find the new requirements as arduous. The emphasis on governance and accountability is aligned to other improvements regulated firms should be looking to make in their compliance frameworks as a matter of course.   

The consultation closes on 3rd March and it’s likely that much of what is proposed will come into effect unchanged. As an appointed representative you should be mindful of the likely changes and start planning for additional reporting requirements. If you act as a principal firm this is a good time to assess your AR relationships and conduct a gap analysis against the proposed requirements so you have time to put into effect any necessary changes. 

We can help 

We have extensive experience working with principal firms and appointed representatives in fund management, wealth management and across all regulated sectors. We can give perimeter advice on whether an AR structure is right for you, assess how your set up would stack up against these proposed requirements and, if necessary, help you apply for full FCA authorisation. 

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