The FCA & the appointed representative regime

By Michelle Bailey

What did the FCA have to say about the AR regime?

The FCA want to improve the Appointed Representative regime

‘An Appointed Representative (AR) is a firm or person who carries on regulated activity on behalf, and under the responsibility of, an authorised firm (the principal). When appointing an AR, the principal assumes responsibility for the regulated activities the AR carries on’ [Source: CP 21/34 Improving the Appointed Representatives regime]

Earlier this month the FCA published a consultation paper where they propose changes to the Appointed Representatives regime primarily because they believe that serious harm is occurring owing to a lack of due diligence on the ARs by the Principals, poor oversight and ongoing controls.

This is a quick run through of some of the key messages from the consultation paper, but first a little data…

There are around 40,000 ARs who operate under around 3600 principals and the number of ARs under one firm can differ greatly. Interestingly, the FCA have determined that on average when comparing principals and non principals across all sectors, principals generate 50 -400% more supervisory cases and complaints, clearly highlighting an issue surrounding ARs and principals.

Previously issues have been seen in the insurance and investment management sector, but this has now also been reflected in the wholesale and retail markets where this Principal/AR model operates. Harm is occurring and some ARs are abusing their authority under their principals, so something needs to change.

Changes to current information requirements

Currently the information the FCA request on ARs is limited, under the new proposal the FCA would like firms to provide more comprehensive information such as the ARs business, revenue, any complaints made and although already a requirement, the FCA would like more detail around their regulated and unregulated activities. This will help them identify potential risks and areas of potential harm before any appointments are made. Further details collected would relate to the reason the AR will be appointed and a number of specific questions about the AR themselves, such as (but not limited to) information on commission and/or fees and information on the company and/or group structure of the AR, rather than the current ‘high-level’ questions. There would also be enhanced requirements for ARs to notify the FCA of certain changes to their business such as any changes to non-regulated business or ownership changes.

Another notable change would be for the permitted regulated activities of the AR to be visible on the FS register, this way, consumers would have access to this data. As well as this change there is a proposed change to complaints data. Current complaints data is logged under the principal, so the proposal is for the complaints data to be separated out so that any complaints about an AR can be easily seen and the FCA can build up a picture of patterns and trends, enabling them to identify any problematic ARs or areas of concern.

What are a principal’s responsibilities?

The FCA expect that principals will assess senior management at an AR to ensure they are fit and proper, this should ensure that the AR works in line and in scope with the appointment they have with the principal (more guidance would be provided to principals on specific areas of competency and capability questions). As such new guidance would be added (SUP 12.6.5BG) outlining the principals need to ensure they have appropriate safeguards in place such as enhanced monitoring for any tasks which are delegated to an AR. The principal also needs to factor in any previous issues the AR has faced such as court proceedings or bankruptcy and their current financial position and these assessments should take place on an annual basis. The FCA propose to outline further guidance on what principals can do to ensure they are taking ‘reasonable steps’ to ensure a high level of oversight of ARs, ensuring they are operating within the correct activity of their appointment.

Controls already in place outline how the principal needs oversight of an ARs activities, such as risk, compliance and audit functions. However, current guidance fails to clearly outline the requirement that principals have ‘adequate’ controls and resources to oversee an ARs activities, so the consultation outlines clearer supervision requirement and a condition that this be reviewed on an annual basis and principals should look to delay the appointment of a new AR or terminate a relationship should issues be identified. The size and growth of the AR also needs to be considered and the resources allocated to oversight adjusted accordingly. Termination of an AR is also a key area of the consultation paper, with further guidance being outlined for circumstances upon which termination might be necessary and a requirement for a clear and ordered winddown.

The FCA are also proposing new guidance and greater oversight of financial services staff at ARs and want principals to view these staff in light of the standards they would apply to the staff working at the principal themselves. There are a number of recommendations outlined such as periodic meetings with the AR and reviewing the ARs MI in order to scrutinise it as applicable and identify any risks and issues. There is also a large section outlining the principal’s ability to assess for potential harms that can and/or are being caused by the AR, taking into account the fair treatment of vulnerable customers and any associated risks posed by the ARs own business model or governance for example.

How will this get reported?

Most of the additional oversight and information changes listed above would then need to be added to a new self-assessment document which would be available to the FCA upon request. The document should outline the relevant methodologies used to determine competency and used to demonstrate that ARs are meeting the expectations outlined by the principal and their own regulatory responsibilities. It is emphasised that this should not be regarded as a tick box exercise, but as a valuable tool for identifying areas of weakness and potential harm and risk.

Each of these information requirements have their own time frame for reporting which the FCA are also asking for feedback on to decide whether or not their proposed timings are reasonable or not.

What are the FCA expecting to achieve?

The FCA believe that the outcome of these changes will allow for better transparency for consumers which means that ARs are much less likely to mis-sell products and services. They believe this will all lead to greater consumer protection and that the new regime protects the stability of products and services and encourages healthy and effective competition. It should also lead to a reduction in complaints and misconduct, which has a positive impact on the entire UK business market. Ultimately it is the principal themselves who are responsible for overseeing ARs so it is our opinion that any strengthening of oversight and guidance should be welcomed. The FCA also document a number of areas for potential future change in section 5 of the document which makes for interesting reading.

And finally…

The full consultation paper can be found here and get in touch if you would like to talk about what this might mean for your firm.