FCA signals reform for Appointed Representatives regime

The FCA has been signalling for some time now that it intends to reform the Appointed Representative (AR) regime. “Tightening our supervision and supervisory expectations of Appointed Representatives and their principal firms” was one of the FCA’s wholesale priorities from its July Business Plan. The FCA’s latest consultation proposes two main areas of change for the AR regime. First, the FCA proposes to require principals to provide additional information and notifications regarding their ARs. Second, the FCA proposes to clarify and strengthen the responsibilities and expectations of principals. Additionally, the FCA is looking to simplify the structure of the rules and guidance relating to ARs in Chapter 12 of its Supervision manual (SUP 12) and seeking views on other potential areas for policy change within the AR regime.

The FCA is working with HM Treasury to explore whether legislative change is needed. HM Treasury has published a call for evidence aimed at gathering information on how market participants use the AR regime and how effectively it works in practice, and also gathering views on potential challenges to the safe operation of the AR regime and possible future reforms.

The FCA and HM Treasury are inviting comments until 3 March 2022. The FCA intends to publish a follow-up Policy Statement and final rules by June 2022.

AR regime

An AR is a firm or person that carries on a regulated activity on behalf, and under the responsibility of, a firm authorised by the FCA (the principal). The regime was originally introduced in 1986 primarily to allow self-employed people to engage in regulated activities without having to be authorised. The model was popular in industries such as insurance. However, in recent years the regime has evolved to include a wider range of models such as regulatory hosting (i.e. where the principal does not carry on any substantive regulated activities itself but solely oversees the use of its permissions by its ARs).

The FCA acknowledges there are certain benefits associated with the AR regime (including encouraging effective competition and providing market access), however, the FCA also sees certain risks. The FCA’s data shows that, on average, principals cause 50% to 400% more supervisory cases than non-principals, indicating that there are more issues arising from principals and appointed representatives than from directly authorised firms.

Proposed changes to information and notification requirements

The FCA believes that having more information on ARs and principals will allow it to better assess principals’ arrangements to monitor and control their ARs’ activities, and better identify any risks. Information that principals would be required to provide under the proposals would include:

• Information on the AR’s business
• Information on the AR’s revenue
• Complaints against the AR
• Information on the AR’s regulated and non-regulated activities (the former to be included on the Financial Services Register)

Proposed changes to clarify and strengthen the FCA’s expectations of principals

The FCA is looking to make clear the standards principals need to meet for their ARs, ensuring effective oversight of ARs and enabling principals to better identify where there are issues that require action. The FCA’s proposals aim to:

• Clarify principals’ responsibilities for their ARs and the FCA’s expectations as to how a principal should be ensuring a high standard for both itself and its ARs
• Strengthen requirements for principals’ oversight of ARs, including the need to have sufficient resources and to monitor AR growth
• Give principals clearer guidance on how and when it may be necessary to terminate an AR relationship
• Require principals to annually review senior management at ARs and aspects of ARs’ business and activities
• Require principals to complete an annual self-assessment of compliance with relevant rules and guidance

Areas for potential policy changes

The FCA believes that there is the potential for harm within the regulatory hosting model and where there are smaller principals with larger ARs and overseas ARs.

• Regulatory hosting model - the FCA Supervision team has identified various issues arising from the regulatory hosting model e.g. principals applying too little resources to overseeing ARs, lack of skills and experience in the different markets in which the ARs operate, and lack of appropriate systems and controls in place to enable principals to effectively oversee their ARs. The FCA has found that regulatory hosts have more complaints against them than other principals.

• Smaller principals with larger ARs - the FCA is concerned that, where a principal becomes overly reliant on the AR to sustain its business, this might undermine the independence and effectiveness of its oversight. The relative size and complexity of larger ARs can also mean a principal does not have sufficient skills and resource to effectively oversee them.

• Overseas ARs – the FCA is concerned that practice of appointing overseas ARs may be used, by some ARs or potential ARs, as a way to access UK markets instead of seeking Part 4A FSMA permission to carry on regulated activities in the UK. The FCA also considers that the extra-territorial element of the AR arrangement increases the risk of the principal not being able to adequately oversee the AR’s activities.

The FCA is seeking views on the harms and benefits of the above models, and ways to mitigate the potential harms (including banning the use of regulatory hosting arrangements and limiting the size of ARs).

Comment

The AR regime is in the limelight at the moment and we are aware that the FCA is stepping up its supervision of principal firms. The FCA has also indicated that principal firms should expect greater scrutiny. For example, the FCA’s October Perimeter Report stated:

“we will carry out targeted and proactive supervision of those aspects of ARs’ interactions with consumers, and principals’ oversight of their ARs or sectors or groups of firms, where we consider that use of the AR regime is a particular driver of harm. We will also intensify our scrutiny of all principal firms, and applicants which intend to appoint ARs, seeking permissions at the gateway. In a small pilot of this tighter approach, 50% of firms intending to appoint ARs have either withdrawn their applications or we have decided to refuse them”

It is therefore clear that the onboarding of new ARs is going to be a key area of interest for the FCA. Another area of interest is likely to be how principals currently perform ongoing monitoring of ARs. This would include principals monitoring the solvency of ARs, monitoring conflicts of interest within ARs and monitoring the ARs’ distribution activities (if applicable).

The FCA’s consultation was released shortly before the FCA’s New Consumer Duty consultation. The overall aim of the new Consumer Duty is to get firms focusing on customer outcomes. This aligns with the FCA’s goal here of getting principals to more actively assess and prevent any AR activities that create an undue risk of harm to consumers.