Appointed representatives: a new regime is now in force
Significant changes to the Financial Conduct Authority (FCA)’s appointed representatives (AR) regime came into force on 8 December 2022. These changes stem from FCA reviews which identified failings within the AR sector; “harms” such as mis-selling or fraud were found to be arising at much high levels within AR arrangements than for firms that were directly regulated by the FCA. The FCA notes in its August 2022 policy statement (PS 22/11, “Improvements to the Appointed Representatives Regime”) that from 2018 to mid 2019, principals (i.e. those firms that “host” ARs) and their ARs accounted for 61% of the value of claims at the financial ombudsman (totalling £1.1b).
The FCA nevertheless has acknowledged in PS 22/11 that the AR regime has many benefits, such as providing market access to smaller firms and supporting innovation. The FCA states that its proposals are intended to be proportionate and balanced, “to ensure the benefits of the regime are retained while effectively addressing the harms.”
The changes to the AR regime comprise a suite of information and notification requirements for principals, which are in addition to (rather than instead of) the rules which currently apply to these firms. The key changes are as follows:
- Principals must notify the FCA whether they provide, or intend to provide, “regulatory hosting services”. A “regulatory host” has been defined as a firm that: “offers or provides a service by which unauthorised persons, whether or not in the same group as the firm, may become ARs of the firm; and provides this service for remuneration with a view to profit.”
- Principals must notify the FCA of future AR appointments 30 calendar days before the appointment takes effect (after the principal has completed their due diligence and established that the arrangement is viable as envisaged under the rules).
- Principals must now provide the FCA with more detailed information about proposed ARs 30 days before their appointment (including information on the AR’s group structure, whether secondees will sit within the principal to carry on (for example) portfolio management services and why, whether the AR will provide services to retail clients, information on arrangements with the AR’s previous principals and the financial arrangement between the principal and the AR).
- Principals must notify the FCA 10 days before a change to any of an AR’s regulated activities.
- Annual disclosures for principals regarding their existing ARs (such as verifying the ARs details on the Financial Services Register and submission of data on revenue sources and complaints). Senior managers of principals must verify annually that their arrangements for the supervision of each AR is adequate.
- Principals will be required to apply enhanced oversight when monitoring their ARs (principals are now to oversee ARs to a comparable standard as if they were employees of the principal), while principals must ensure adequacy of the systems and controls they have in place. Where these are found inadequate, principals may consider terminating relationships or a notification may need to be made to the FCA;
- New triggers have been introduced for the termination of AR agreements.
- A self-assessment document designed to identify risks and gaps in compliance is required to be prepared annually by each principal; this document should focus on how the principal itself is meeting its responsibilities in relation to its ARs. The document must be reviewed and signed-off by the principal’s governing body at least every 12 months.
Principal firms will now be hearing from the FCA with a Section 165 data request for information on their existing ARs; they will have 60 days from receipt to respond to this request.
While the rules took effect from 8 December 2022, firms should note that some transitional provisions have been included to allow firms time to gear up to their reporting requirements with respect to existing AR arrangements. In summary, principals are not expected to make their first reports on existing ARs until the end of this year (2023); certain reports will be required by 30 November 2023 (such as reporting on ARs activities, business and senior management) while the provision of other information is triggered by the occurrence of the first accounting date on or after 1 December 2023 (such as complaints data and revenue information on ARs). While this is some time away, firms should begin putting in place arrangements to allow them to collect the requisite data and consider how this may be effectively analysed and reported. Further, the FCA have introduced a transitional period for the self-assessment document which will allow principals to prepare their initial assessment and seek approval from their governing body on or before 30 November 2023.
In terms of next steps for firms, principals should by now have updated and reviewed their template AR agreements to ensure that these allow for wider oversight and information-gathering powers as required by the rules. Termination event clauses must also be updated to address the new requirements. Arrangements with existing ARs should be revisited and updated to ensure that principals are able to comply with their obligations under the rules. Principals may even need to consider whether there is a need to terminate existing AR arrangements which may not be viable under the new requirements.
The FCA has made clear that the AR sector is an area of key concern for the future, and these changes mark the beginning of a sharpening up of the oversight of AR arrangements. Inevitably, a requirement for greater oversight of ARs will result in increased charges being levied by principals, while ARs may feel more heavily “regulated” than they did before the rules came into force. This may result in regulatory hosting arrangements being used all the more temporarily by firms entering the market, whereby the option of being directly regulated by the FCA may on balance become more attractive over time.