FCA Releases Final Rules on the Use of Appointed Representatives
After an extensive period of review and reflection, the UK Financial Conduct Authority (FCA) has now published its final rules and guidance concerning the Appointed Representatives (“AR”) regime, which aims to reduce potential harm and protect consumers.
The AR arrangement is a long-established compliant solution allowing firms to conduct certain regulated activities without the need for a direct licence from the FCA.
With the new rules, the regulator seeks to ensure stronger and better oversight, thereby aiding the earlier identification of problems or matters that might cause harm.
Principal firms ̶ under which an AR is permitted to utilise the same extensive FCA regulatory permissions already held by the principal firm — have also come under the spotlight. The FCA emphasises the need for greater, more in-depth, understanding of their ARs and their responsibilities when appointing an AR. This is against a backdrop of supervisory findings which identified serious shortcomings in Principal firms’ understanding of their regulatory responsibilities for ARs and £1.1bn* worth of Financial Services Compensation Scheme claims.
Furthermore, the regulator also highlighted that Principal firms generate up to 400% more supervisory cases and complaints than non-Principal firms. The FCA concluded that the number of shortcomings identified supported the need for intervention.
The final rules include new information and notification requirements for Principal firms that aim to strengthen the AR regime. The FCA also clarifies its expectations of Principal firms who should take more ‘effective’ responsibility for their ARs by:
- Applying enhanced oversight – by ensuring they have adequate systems and controls and sufficient resources as well as monitoring AR growth.
- Monitoring and assessing the risk of harm to consumers and market integrity and overseeing ARs to a comparable standard as they would to their own business.
- Reviewing information about their ARs’ activities, business, and senior management on an annual basis and being clear on the circumstances when they should terminate an AR relationship (and subsequently assist with an orderly wind down). As part of this, Principal firms need to prepare a self-assessment document (this is a single document designed to identify any risks and gaps in compliance with the firm’s obligations as a Principal firm) at least once a year – which should cover how they meet the requirements of the policy.
- Notifying the FCA of future AR appointments 30 calendar days before they take effect.
- Providing information about their existing ARs within 60 days of the rules coming into force. As this data is key to enabling the FCA to identify potential issues with Principal firms and ARs, it will be collected via a Section 165 data request in December 2022.
- Providing complaints data and revenue information for each AR on an annual basis. Principal firms will have up to 60 business days after their accounting reference date to report this data. The FCA is introducing revenue bands for annually reporting AR revenue from non-financial non-regulated activities.
- Notifying the FCA at least 60 calendar days in advance as to whether Principal firms intend to conduct regulatory hosting services. The regulator clarifies that it is not imposing any additional rules or restrictions on firms which provide such services at this time.
Policy Statement 22/11 demonstrates that the regulator is following through on commitments outlined in its Strategy for 2022-2025 to improve its oversight of ARs and ensure that Principal firms are held to much higher standards going forward. These final rules will result in the FCA receiving more comprehensive data intended to help it better identify potential risks and target interventions.
It will also, therefore, mean a greater scrutiny of firms with, and those looking to appoint, ARs. There is clearly an expectation from the FCA that Principal firms do more – and do better – to reduce the potential risks of harm to consumers and markets, especially when it comes to oversight and monitoring of their ARs and their business activities.
*From 2018 to H1 2019.
With the deadline for the new rules fast approaching, Principal firms are advised to start their implementation projects without delay. They should review the new requirements and document the specific changes and actions needed (on a timeline) in order to ensure compliance.
While the new information and notification requirements represent an additional regulatory burden, many of the ongoing requirements will require Principal firms to allocate additional resources to their AR arrangements to ensure they have access to the information the FCA now requires. Firms should also be sure to enhance their systems and controls to ensure they have effective oversight of their ARs.
Principal firms may also need to amend their contractual arrangements and/or, on the former; agreements will need to include specific provisions on termination and contractual rights as well as provisions for the communication of data. The new rules take effect on 8 December 2022 by which time Principal firms can anticipate greater scrutiny and engagement from the FCA.
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