Improving the Appointed Representatives Regime

The FCA has consulted on proposed changes to the Appointed Representatives (AR) regime. The proposed changes aim to reduce potential harm arising across the sectors where they operate.

 

The context in which these changes are considered necessary is that FCA data show that principals have more complaints per £1m of revenue compared to non-principals, particularly where they are smaller in size. This suggests that smaller principals are not able to resolve problems leading to complaints as effectively as larger principals. The data also show that complaints are generally higher for principals than non-principals across sectors (apart from principals with <£200k revenue from regulated activities in the mortgage intermediaries sector).It is seeing this harm across firms that have ARs that is driving the proposed changes with the aim to reduce potential harm and ensure that the regime delivers good outcomes for consumers and markets.

The FCA is concerned that principals do not perform enough due diligence before appointing, and have inadequate oversight and control after appointing ARs.

The AR regime was set up over 35 years ago and has evolved to allow, primarily small, firms to engage in regulated activities without having to be directly authorised. The principal is the authorised firm and is responsible for the recruitment and continued monitoring of ARs following rules set out in SUP 12.

What does the FCA wish to change?

The two main objectives from CP 21/34 are stated as:

  • Additional information on ARs and notification requirements for principals
    This will allow us to more easily identify potential risks within principals and ARs. It will also help us better assess whether the principal has the expertise, systems and controls to effectively oversee its ARs and to target our supervisory interventions more effectively.
  • Clarifying and strengthening the responsibilities and expectations of principals
    … in our rules and providing additional guidance for principals on their responsibilities, and our expectations of how they should act and oversee their ARs

If the Consultation Paper becomes Policy, which is likely, the FCA will want information on the following from the principal:

  • The AR’s business model (regulated activities, clients etc)
  • The AR’s revenue from both regulated and non-regulated activities
  • Complaints against the AR
  • The AR’s regulated and non-regulated business

There will also be enhanced reporting requirements for what the FCA refers to as significant changes.

The FCA register will change to include the nature of the regulated activities for each AR that the principal takes responsibility for.

Accuracy of details will have to be confirmed at least annually on a new form.

The FCA is going to enhance its expectations of the principals to include:

  • clarify principals’ responsibilities for their ARs
  • improve existing oversight requirements
  • give principals more detail on the circumstances in which it may be necessary to terminate an AR relationship, and if so, how they should ensure that the relationship is wound down in an orderly way
  • require principals to annually review senior management at ARs and aspects of ARs’ business and activities, and
  • require principals to complete an annual self-assessment of compliance with relevant rules and guidance for ARs

The paper emphasises the FCA’s expectations for AR senior management fitness and propriety assessments on an annual basis.

The FCA proposes that the principal’s assessment should include whether senior management is appropriately experienced and trained, have the necessary time to perform tasks and have requisite knowledge and skills to undertake tasks.

Principals need to have sufficient resource and adequate controls and systems in place to check the accuracy of information received from ARs.

The FCA expect principals to have sufficient resource to adapt to AR growth.

The principal should have a risk based approach and is able to identify risks and the potential harm / impact from the AR them.

The FCA proposals include providing clearer guidance on how and when they should terminate AR relationships.

Finally, the FCA proposes that principals explain in a self-assessment document how they meet the FCA’s expectations.

There is more detailed information in the Consultation Paper.

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

These are key changes that will be a shock to some but will not need much adaptation for those principals that have a strong approach to risk governance.

Action Required By You

We recommend that both Principal Firms and Appointed Representatives familiarise themselves with the content of the consultation paper in anticipation of the rule changes expected in the second half of 2022.
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About the Author

Mike is a Chartered Financial Planner and a Fellow. He has been an ATEB consultant for over 10 years but has worked in financial services for a great deal longer. He has a wide breadth of experience covering banking and lending, home finance, pensions, investments, consumer credit and general insurance.

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