New appointed representative requirements on way for UK financial firms

Juan Jose Manchado of Pinsent Masons said: “Existing agreements may already be drafted broadly enough to satisfy the regulator’s demand for more information on ARs, but principals would be well advised to double check this and, of course, make sure that systems are in place to facilitate that flow of information.”

His comments came after the Financial Conduct Authority (FCA) confirmed plans to stiffen oversight responsibilities for authorised financial firms, known as principals, for their appointed representatives (ARs). ARs carry out certain regulated activities but are not directly authorised by the FCA. Instead, principals are responsible for overseeing their ARs’ regulated activities, but the FCA said it had found a higher incidence of harms, from mis-selling to fraud, in all sectors where principals and ARs operate.

In a policy statement (145 pages / 1.56MB PDF) the regulator said that harm often occurs because principals “do not undertake adequate due diligence before appointing an AR” or maintain “poor on-going control and oversight.” It said the new rules, set to come into force on 8 December 2022, will help protect consumers and markets. The new rules include a strengthened framework for requiring principal firms to ensure they have appropriate systems, controls and resources to oversee their ARs effectively.

Principals will be required to notify the FCA of future AR appointments 30 calendar days before they take effect and provide complaints and revenue information on their ARs to the FCA on an annual basis. The FCA said it would require significantly less data in respect of ‘introducer’ appointed representatives (IARs) because of the limited scope of activities that IARs are permitted to undertake, and lower potential risk as a result.

Manchado said: “There is a new expectation that AR agreements should require the AR to provide the principal with all the information necessary for the principal to comply with the FCA’s rules, including the principal’s new obligations in relation to appointment reviews, and expanded notification and reporting requirements. It is therefore important to consider how the upcoming changes to the regulatory framework may impact on existing AR agreements.”

“There is also a new rule requiring the principal to be able to terminate the agreement when no longer able to oversee the AR, by reference to, among other factors, the AR’s solvency and suitability. Although some existing agreements already comply with this rule, compliance may not be as widespread as for clauses requiring the AR to provide information,” Manchado said.

He added: “In that regard, it is welcome that the new rules include a transitional provision that disapplies this requirement for agreements already in place at the time the new regime comes into force in December. However, principals will need to include this clause in their agreements as soon as they are up for renewal or revision after December.”

The FCA said that, although principals should mostly be focussed on their ARs’ regulated activities, to oversee their ARs effectively and identify potential risks and harm to consumers, they should also have knowledge of the “full scope” of their AR’s non-regulated activities. The regulator amended its proposals, however, so that principals will only be required to provide up-to-date information on ARs’ financial non-regulated activities and not, as was proposed, on their non-regulated activity that is not financial in nature.

The FCA noted that some respondents to its consultation on the new rules challenged the proposed requirement for principals to collect data on the proportion of their ARs’ regulated activities compared to their non-regulated activities. The FCA removed this requirement from the final rules. It also amended the proposed requirement for principals to provide an estimated figure of an AR’s revenue from regulated and non-regulated activities in the first year of appointment, after some challenge from consultation respondents. Feedback suggested using revenue ‘bands’ instead, which the regulator noted are “somewhat inaccurate” but would be easier for firms to report on.

Principals will not be required to notify the FCA of a change to an AR’s name 10 days before the change takes effect as was originally proposed. Instead, firms will need to report a change to an AR’s name within 10 business days. The FCA said such information was “not particularly time sensitive” and that the requirement struck the “correct balance” between keeping AR information up to date and allowing for the name change to be made at Companies House first. Changes to the regulated activities an AR can carry on will however need to be notified at least 10 calendar days before the change takes place.

The FCA said it was committed to using improved data and analytical tools to carry out targeted supervision of principal firms across the financial services sector, aiming to improve oversight of ARs as part of its new three-year strategy. Increasing scrutiny on firms both as they appoint ARs and applying for authorisation as prospective principal firms was also flagged by the FCA in its Business Plan 2022-23. It added that it was also working with HM Treasury to explore other changes to the AR regime that would require legislative change.

Josie Day of Pinsent Masons said “Looking ahead it will be interesting to see how policy and the legislative framework supporting the principal/AR relationship may yet change further. What we have now is detailed reporting changes for principals within FCA’s rules, but in its discussion paper the FCA also sought the market’s views on broader issues concerning the use of the AR regime on which it has not yet given its views.

“These included regulatory hosting models, the ‘host AIFM’ model, the pros and cons of smaller principals with larger ARs, and the challenges associated with appointing ARs overseas. With Treasury also having called recently for evidence on the effectiveness of a regime which has expanded into these areas, further changes to legislation in the AR space could be on the cards,” she added.