Appointed Representative regime changes

In our previous article following the issuance of FCA Policy Statement PS22/11, we covered the Regulator’s rationale for changes to the Appointed Representative (AR) regime and the outcomes it is looking for. This article looks in more detail at the new rules and requirements and the wider impacts of the revised requirements.

New requirements

  • Principals must notify the FCA of future AR appointments 30 days before the appointment takes effect – initial proposals were for this to be 60 days.
  • Where the appointment of the AR involves an Approved Persons process, the 30 days pre-notification period is not in addition to the existing three-month period for determination of approved persons applications. The pre-notification rule would mean that the earliest an AR can begin operating is 30 calendar days following the appointment notification. Where an Approved Person is needed, the AR would be able to conduct the regulated activities after the individual has been approved, as per the existing process.
  • Within 60 days of rules coming into force, principals must provide information on their existing ARs. This will be conducted via a Section 165 data request (a statutory tool available to the FCA), so it will be a mandatory requirement. Firms with 10 ARs or more will be asked to complete an Excel spreadsheet for all their ARs to avoid repetition.
  • Principals will be expected to provide more information on the business of their ARs, including the nature of the regulated activities the ARs will conduct, including information on financial non-regulated activities as well as regulated activity.
  • An introduction of bands for reporting anticipated revenue of the AR from regulated and non-regulated activity during the first year of appointment.
  • Principals already provide complaints data and revenue information for ARs on an annual basis, but the timeframe for reporting is increasing from up to 30 business days after the principal firm’s accounting reference date to up to 60 business days.
  • A requirement to notify the FCA in advance of a firm’s intention to provide ‘regulatory hosting’ – allowing businesses to perform regulated activity without being FCA approved.

Principals appointing new ARs need to confirm:

  • The primary reason for the principal’s intention to appoint the AR and the nature of the regulated activities the principal will permit the AR to undertake.
  • Whether the AR will provide services to retail clients.
  • Whether the AR is part of a group. If so, provide the name of the parent undertaking(s).
  • Whether any individuals from the AR will be seconded or contracted to the principal firm to carry on portfolio management and/or dealing activities, and if so explain the rationale for entering into such an arrangement.
  • Whether the AR was previously an AR of a different principal, and if so, why the previous relationship was terminated.
  • Information about the nature of the financial arrangements between the principal and the AR.
  • Details of non-regulated business of the AR.
  • Anticipated revenue from regulated and non-regulated activity during the first year of appointment, primarily to assess the likely size of the AR. Due to the difficulty in making estimations of this nature the FCA is introducing bandings to cover estimated revenue.

And on an ongoing basis:

  • Notify the FCA of any changes to types of regulated activities the principal allows the AR to carry on require notification at least 10 calendar days before the change takes effect.
  • Confirm the accuracy of AR data on the FCA Register on an annual basis. This will be verified via an annual attestation on Connect.
  • Assess competence and capability of individuals at ARs. Considerations in approaching the assessment include whether senior management at the AR are appropriately experienced and trained to be responsible for the activities and business they undertake on behalf of the principal, and whether they have the necessary time to perform the tasks/functions for which they are responsible.
  • Assess fitness and propriety of individuals at ARs, ensuring and verifying accuracy of information provided by ARs and discussing omissions or concerns proactively with relevant persons at the AR.
  • Review whether senior management at its ARs remain fit and proper to act in that capacity, on an annual basis (see SUP 12.6A.2R)

The FCA does not expect principals to submit financial accounts for ARs, but on an annual basis it requires the total revenue figures broken down by the type of activity the revenue is generated from. To reduce some of the burden on firms in completing this, principals can round this figure to the nearest £5k and submit the data within 60 business days of the principal’s ARD, not 30 days as proposed in the CP.

Triggers for review of oversight appropriateness

The guidance for triggering a review of oversight appropriateness is within SUP 12.4.4FG and this has been expanded to include the following additional circumstances:

  • A significant increase in complaints received by the principal about the AR’s activities or business.
  • A change in the AR’s target market.
  • A change to the AR’s scope of appointment (within the principal’s permissions).
  • Fundamentally, any activity which would raise concerns or is outside the norm.

Where a firm identifies an issue with an AR, the FCA expects firms to fix it as a matter of urgency (see SUP 12.6.1R) and provide notification of this under Principle 11, or not appoint the AR until the issue is satisfactorily resolved. Principals should consider whether changes could have been reasonably foreseen and approach matters pragmatically.

Termination of AR contract where the AR is too large

Principals should act where they cannot keep pace with AR growth. Where termination is considered necessary, principals must ensure that they have considered how, where appropriate, they will help the AR wind down relevant business (see the new rule at SUP 12.8.3R).

How the FCA would expect principals to approach remediating issues and/or terminating AR contracts would depend on the issue with the AR. For example, where the size or volume of the AR’s regulated business increases significantly in a short period of time, the principal would be expected to assess the risk arising from the AR’s changed circumstances. Principals may consider requiring more information from an AR that is growing significantly, to understand the drivers for growth and consider what steps the AR is taking, or should be taking, to mitigate the potential elevated risks arising from increased and sudden growth and whether the principal’s own oversight needs to adapt.

If the AR is not managing the increased risk appropriately and/or the principal is unable or unwilling to increase its oversight arrangements and capabilities, the FCA would expect it to terminate the contract.

The principal would also be expected to assess how its oversight arrangements should change, often with a view to increasing the oversight activities in relation to the AR and the resources applied to overseeing it, to match the increased level of activity and potential higher risks. In some cases, it may be more appropriate for an AR to instead seek direct authorisation.

It should also ensure that the AR is effectively managing the risks arising from increased turnover, including lack of resources, knowledge retention, and management spans of controls, or otherwise terminate the relationship.

Principals will not need to revise existing contracts until the next natural contract revision/renewal point. SUP 12.5.5R requires firms to amend an existing contract at the first point that the contract is subject to renewal or revision.

As a principal accepts responsibility for an AR’s activity within the scope of its permission, a principal should also act responsibly when it terminates that relationship. This means that a principal should take reasonable steps to ensure that a business is wound down in an orderly way. Given the principal will no longer have responsibility for the AR once the contract has ended, as soon as it provides the AR with notice of termination, the principal should ensure it helps the AR to ensure the orderly wind down of any relevant business.

Principals are to proactively consider whether termination is necessary

Ahead of giving notice, the FCA would expect a principal to proactively consider, and discuss with the AR, its plans for facilitating orderly wind down should termination be necessary. The principal should also consider any potential impact on the AR’s customers and plan how it will address these. It may take principals longer to ensure an orderly wind down, particularly where it has identified wider impacts to consumers or markets. Under SUP 12.8.3 R principals are required to ensure that any outstanding regulated activities and obligations of the AR to customers are properly completed and fulfilled.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

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Our View

This is a key development for ARs and AR principals. The timeframe for implementation of the new rules is short and their effects are wide ranging. The FCA clearly expects principals to take control of AR firms and where necessary, take action.

Action Required By You

PS22/11 introduces new rules which firms simply cannot ignore. Principals will be faced with a Section 165 request for data and information shortly after the new rules come into effect, so preparation and awareness of the requirements in this regard are imperative.
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About the Author

Paul has in-depth experience across a wide spectrum, having headed up compliance, T&C, monitoring, oversight and MLRO functions previously. He was also an IFA for some time so can see things from more than one angle.

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