Changes coming to the Appointed Representatives Regime – and soon!

FCA recently published Policy Statement (PS22/11) announcing some key changes to the Appointed Representatives (AR) regime, affecting both AR firms and their Principals.

The changes, which are wide ranging, come into effect on 8 December 2022 and whilst transitional arrangements allow firms more time to comply with some of the new rules (particularly those requiring them to submit information on an on-going basis and to review their ARs then self-assess annually), with less than four months before the new regime comes into effect means that firms need to act pretty quickly.

As these changes are detailed we are covering them across two articles, the first of which looks at the background and FCA expectations, followed by a second which looks at the new requirements in more detail.

FCA has identified what is considered to be ‘a wide range of harm across all the sectors where principals and ARs operate, because principals do not undertake adequate due diligence before appointing an AR, and/or due to poor on-going control and oversight’.

As a result, PS 22/11 introduces new rules requiring principals to:

  • More carefully assess applications for new ARs and be able to justify their appointment.
  • Provide FCA with considerably more detail on existing ARs, particularly in relation to complaints and financials.
  • More closely examine the activities performed by ARs.
  • Notify FCA of any changes to these activities.
  • Assess competence and capability of individuals at ARs.
  • Perform ‘oversight appropriateness’ reviews.
  • Where appropriate, terminate the AR relationship.

The Policy Statement follows proposals made in CP21/34, which focused on two main areas of change:

  • Collecting additional information on ARs and strengthening reporting requirements for principals, and;
  • Clarifying and strengthening the responsibilities and expectations of principals.

The PS will affect all firms that currently have ARs or intend to have ARs in future and will also affect ARs themselves. FCA estimates that there are currently around 3,400 principals with around 37,000 ARs, including Introducer ARs (IARs), so the impact is pretty significant.

Data analysis performed by the Regulator revealed the following:

  • From 2018 to H1 2019, principals and ARs accounted for 61% of value from FSCS claims, for which the total was £1.1bn during this period .
  • On average, principals cause 50 to 400% more supervisory cases and complaints than non-principals (other directly authorised firms).
  • Supervisory cases were higher for principals across all sectors, and;
  • FCA complaints, Financial Ombudsman Service (FOS) complaints and supervision cases were all higher per pound of revenue for principal firms compared to those with no ARs across all the markets looked at.

The 2021 Treasury Select Committee (TSC) report on Lessons from Greensill made a recommendation for the FCA and the Treasury to consider reforms to the AR regime, with the aim of limiting its scope and reducing opportunities for misuse. These are supplemented by the Consumer Duty (the Duty), which sets new, higher standards of care that firms should give to consumers.

All of this should come as no surprise, as FCA set out its intentions in its Business Plan and ‘Our Strategy 2022-2025’, which proposed:

  • Greater engagement with, and scrutiny of, firms as they appoint ARs, both for new applicants and firms already authorised.
  • Targeted supervision of principal firms across the whole financial services sector, using improved data and analytical tools, and;
  • Introducing a new fee that principals must pay for each of their ARs to help fund FCA’s work in this area.

In October 2021, FCA sent about half the total population of principals and ARs a survey asking them to provide additional detail on their ARs. This included questions on ARs’ revenue, business models and activities.

The data collected is aimed at helping FCA:

  • Better identify potential risks and target interventions.
  • Increase consumer protection by providing additional clarity on principals’ responsibilities and expectations of them.
  • To intervene early, reducing consumer harm.
  • Strengthen the oversight of ARs by principals leading to greater stability and resilience.
  • Reduce misconduct and complaints across the market as a whole, enhancing market integrity.
  • Ensure that the AR model operates effectively, with firms upholding standards, competing in consumers’ interests.

So what outcomes are the FCA looking for?

  • Principals understand their responsibilities in relation to ARs, have stronger and better oversight of, and take more effective responsibility for their ARs.
  • Better challenge to firms with, and those looking to appoint, ARs.
  • Principals address problems with their ARs that are, or have the potential to, cause harm to consumers or markets.
  • Consumers can access better‑quality information on principals and ARs and make good decisions when choosing products or services.

To achieve these outcomes FCA expects firms to make the necessary changes to comply with the updated rules, with an expectation that harm will reduce once these have taken effect due to increased focus on principals and ARs. Over time, FCA expects to see a decrease in complaints and supervisory interventions, but possibly an increase in both in the short term.

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.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

After issuing plenty of warning shots FCA has backed these up with new rules affecting literally thousands of advisory firms. It is clear that FCA sees the AR regime as posing significant risk of harm to consumers and AR firms and their principals have a lot to consider and much work to do in a relatively short time frame.

Action Required By You

It is imperative that all connected with the Appointed Representative regime read and fully understand the requirements and new rules within PS22/11. The changes and new rules come into effect within four months, so firms need to be fully prepared. If you have any concerns or queries contact ATEB as soon as possible.
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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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