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Appointed Representatives: FCA confirms changes to increase responsibilities of

Why is the FCA making changes to the current AR regime?

The AR regime came under scrutiny as part of the Greensill Capital inquiry. One of the recommendations from the July 2021 House of Commons Treasury Committee’s report was to consider reforming the regime.

The FCA  consulted on changes to the AR regime in December 2021 as it was seeing a wide range of harm across all the sectors where firms have ARs. As explained by the FCA in the consultation paper, this harm often occurs because principals do not perform enough due diligence before appointing an AR, or from inadequate oversight and control after an AR has been appointed. FCA data analysis found that, on average, principals generate 50 to 400% more complaints and supervisory cases than non-principals across all sectors where this model operates.

What did the FCA consult on and what’s changed in the final rules?

The FCA consulted on two main areas of change affecting its Supervision manual (SUP): firstly requiring principals to provide additional information on ARs and imposing additional notification requirements for principals and secondly enhancing and clarifying the FCA’s expectations of principals and their responsibilities

Although the FCA is not proceeding with all of the changes it consulted on, there are a number of significant changes to the regime.

Information and notification requirements
  • Principals will need to notify the FCA of future AR appointments 30 days before the appointment takes effect.
  • Principals must provide information on their existing ARs. The FCA will collect the data via a Section 165 data request. Principals will have 60 days to submit the data . The FCA thinks that the period between publishing the policy statement and firms having to submit the data to it gives principals enough time to compile and submit the information.
  • Principals will need to provide information about the  financial non-regulated activities of ARs as well as the  anticipated revenue of the AR from regulated and non-regulated activity during the first year of appointment within specified revenue bands.
  • Principals must provide annual complaints data and revenue information for ARs within 60 business days of the principal’s accounting reference date. Revenue bands for annually reporting AR revenue from non-financial non-regulated activities are also being introduced.
  • Principals will need to notify the FCA as to whether they provide currently, or intend to provide, regulatory hosting services.  The FCA makes it clear that the only effect of firms’ business models coming into scope of the definition of ‘regulatory hosting’ is that these firms will need to notify it of their intention to provide such service in advance. The FCA confirms that no additional rules or restrictions on firms which provide such services will be imposed at this time.

As proposed, the majority of the new requirements will apply to both ARs and introducer appointed representatives (IARs), ie ARs who can only undertake limited activities (effecting introductions and distributing financial promotions) on behalf of the principal.

Enhancing and clarifying the FCA’s expectations of principals and their responsibilities

Some of the key FCA proposals included that principals:

  • Apply enhanced oversight of their ARs, including ensuring adequacy of systems and controls, sufficiency of resources and monitoring AR growth;
  • Take more effective responsibility for their ARs, including by monitoring and assessing the risk of harm to consumers and market integrity and overseeing ARs to a comparable standard as if they were employees of the principal;
  • Have clarity on the circumstances where they should terminate an AR relationship and assist ARs with an orderly wind down; and
  • Annually review information on ARs’ activities, business and senior management. Principals would also need to prepare a self‑assessment document at least once a year, covering how they meet the requirements of the policy.

These proposals are being implemented with a few clarifications. The  annual review requirements can be met by principals integrating them into existing internal reporting processes, as long as they continue to meet the standards set out in the rules and guidance. In addition, the annual reviews can be conducted by responsible individuals with a suitable degree of knowledge and authority below the governing body’s level, with significant issues identified at specific ARs escalated to the governing body.

On the self-assessment, the FCA explains that it should focus on how the principal itself is meeting its responsibilities in relation to all of its ARs. It is a single document designed to identify any risks and gaps in compliance with the firm’s obligations as a…

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