Oversight of Appointed Representatives

United Kingdom

The Financial Conduct Authority (“FCA”) has published new rules to improve oversight over appointed representatives (“ARs”), which will take effect on 8 December 2022. These new rules are intended to address shortcomings and potential sources of harm identified by FCA in the operation of the current regime, and will mean authorised firms need to have enhanced oversight and more effective responsibility for the activities and compliance of their ARs.

Background

ARs are not authorised by the FCA but can offer certain financial services and products if an authorised firm accepts responsibility for ensuring the ARs comply with regulatory requirements (such firms are referred to as “principals”). Although acknowledging that the AR regime has benefits, the FCA has raised concerns that there are significant shortcomings in the principals’ understanding of their responsibilities for ARs, and that some principals have been causing harm to consumers (such as mis-selling or fraud) where: (a) the principals do not carry out adequate due diligence prior to appointing an AR; and/or (b) there is poor ongoing control and oversight of the AR.

What will change?

The intended outcome of the changes is that:

  1. The FCA can better challenge principals and firms that may wish to appoint an AR.
  2. Principals have a better understanding of their responsibilities (therefore, better oversight and effective responsibility for the ARs) and an opportunity to address any problems that can cause harm.
  3. Consumers have better quality information and make good decisions when choosing products and services.

The key changes are:[1]

1. Information and notification

Principals will have to provide more information on their ARs to the FCA. For example:

a. When appointing new ARs, principals will have to notify the FCA 30 calendar days before the appointment takes effect.

b. For existing ARs, the FCA will request data and principals will have 60 days to comply.

The types of information include information on any financial non-regulated activities that the ARs carry out and estimated revenue from regulated and non-regulated activity in the first year of the AR’s appointment.

In addition, complaints and revenue data for all ARs will have to be provided annually.

2. Responsibilities of principals

In addition, there are more prescriptive responsibilities for principals, including:

a. Enhanced oversight of ARs, such as ensuring adequate systems and controls, sufficient resources and monitoring the growth of the AR. For example, if the AR’s controls and resources are inadequate, principals should consider notifying the FCA and, if the issue cannot be resolved, terminating the relationship with the AR.

b. More effective responsibility for ARs, including monitoring and assessing the risk of harm and overseeing ARs to a comparable standard as if they were employees. For example, principals should collect and scrutinise management information from the AR and analyse such data to identify emerging risks and issues. 

c. Annual review of AR’s activities, business, senior management and preparing a self-assessment document to explain how the principal itself is meeting its responsibilities for the ARs.

d. Clarity on when the FCA thinks it would be appropriate for principals to terminate an AR relationship (and the general need for an orderly wind down of relevant business). Possible termination grounds includes where the AR has an unusually high senior management turnover rate without a satisfactory explanation.

The new rules are fairly prescriptive, so firms are recommended to review the new rules in detail to fully understand the practicalities of each requirement. For example, the annual self-assessment is intended to be a living breathing document (rather than a form to be ticked and filed away). The FCA expects principals to review the self-assessment to identify any risks and gaps (and rectify any issues). The self-assessment must also be signed off by the firms’ governing body every 12 months and be ready to submit to the FCA (if requested).

Comments

The new rules come as no surprise considering the FCA previously commented that “on average principals generate 50 to 400% more complaints and supervisory cases than non-principals across all sectors where this model operates”.[2]

As such, principals must:

  1. Take steps to review and understand the new rules on ARs (alongside any changes being made to meet the requirements of Consumer Duty);
  2. Ensure appropriate implementation of the rules as soon as possible;
  3. Communicate with existing ARs and clarify what will be required;
  4. Expect further scrutiny from the FCA when appointing new ARs and on existing AR arrangements; and
  5. Expect further changes. The FCA has strongly indicated that further change is to be expected under the AR regime as the new rules are just one part of the changes to be expected.


[1] Note that some of the new rules do not apply to Introducer Appointed Representatives.

[2] CP21/34: Improving the Appointed Representatives regime, paragraph 1.7