The Financial Conduct Authority (FCA) has this month published its policy statement (PS22/11) confirming its final rules reshaping the Appointed Representative (AR) regime to make authorised financial firms acting as principal more responsible for their ARs.
The FCA had previously set out its proposals and invited feedback in a consultation paper (CP21/34) in December 2021. In seeking to address harms and protect consumers, these proposals focused on: (i) collecting additional information on ARs and strengthening reporting requirements for principals; and (ii) clarifying and strengthening the responsibilities and expectations of principals.
Firms who act as principals for ARs will need to undertake a gap analysis of their current policies and processes against the policy statement requirements and augment and adopt those as required. Subject to transitional provisions, the requirements come into effect on 8 December this year. Firms affected by these developments would therefore need to commence their implementation projects as soon as possible to make use of the four-month implementation period.
The AR regime exempts otherwise unauthorised persons from the general prohibition under the Financial Services and Markets Act 2000 (FSMA) on the basis that they operate under the regulatory umbrella and supervision of a regulated principal. This allows ARs to engage in certain regulated activities without having to be authorised in their own right. While the regime has benefits, the FCA has identified a range of harms across all relevant sectors, noting that from 2018 to the beginning of 2019, principals and ARs accounted for 61% of the value from FSCS claims. The FCA notes these harms typically arise where principals have failed to undertake adequate due diligence before appointing an AR, or have poor ongoing control and oversight in place.
Who is affected?
These new rules will be relevant for all firms that currently have ARs or intend to have ARs in the future, and ARs or persons intending to become ARs in the future themselves will also be affected by the proposed changes.
As previously proposed, the FCA has not applied the incoming rules to firms in the Temporary Permissions Regime (TPR) or the Financial Services Contracts Regime (FSCR).
It should also be noted that whilst the new requirements apply to introducer ARs, the FCA is requiring significantly less data on introducer ARs to reflect their limited scope of activities that they are permitted to undertake, and the lower potential risk of their activities as a result.
Information and notification requirements
Broadly, the FCA has confirmed that the following information and notification obligations for principals will come into force:
- Principals will be required to notify the FCA of any intended AR appointments at least 30 days before the appointment is due to take effect, along with various information about the rationale behind the appointment and the AR’s business. This timeframe for pre-notification is reduced from the 60 days proposed in the FCA’s consultation.
- Principals will be required to provide the same relevant information in respect of their existing ARs. This requirement will proceed outside of the final rules and instead the FCA will collect the data via a Section 165 data request to be sent later this year – principals will then have 60 days to submit the data to the FCA on all existing ARs.
- In an effort to keep information on ARs up to date, the FCA is extending to all of the additional information requirements principals’ existing obligation to notify any changes to an AR’s details within 10 days of the relevant update. In contrast, any proposed change to the regulated activities an AR is allowed to carry on must be notified 10 days before such change. In addition, principals will be required to verify the details of their ARs on an annual basis.
- As noted above, the information requirements will be broad. Principals will be required to provide more information on the business of their ARs. Initially, the consultation proposed this include information on all regulated and non-regulated activities of the AR but, following the feedback received, the FCA has decided to limit this to regulated activity and non-regulated financial services activity only. The FCA is also requiring an estimate of anticipated revenues of the AR’s regulated and non-regulated activity during the first year of appointment to be reported against revenue bands.
- Principals will be required to provide data on complaints and revenue information for ARs on an annual basis. The FCA is proceeding with this proposal despite potential cost implications, but has extended the proposed reporting period from 30 to 60 business days after the principal’s accounting reference date.
- Lastly, principals will be required to notify the FCA whether they currently provide, or intend to provide, regulatory hosting services. The notification must be provided at least 60 days before providing those services. The FCA has noted that the only current obligation remains to provide a notification, and the relevant definitions will remain subject to review should obligations be extended in future.
In a deviation from initial proposals, however, following mixed feedback in the consultation, the FCA has not proceeded with the proposal to publish on the FCA Register the nature of the regulated activities the principal permits the AR to undertake. However, the FCA have stated that they are planning to make further changes to the information on ARs displayed on the FCA Register, to make it more accessible to consumers.
Responsibilities of principals and the FCA’s expectations
The FCA has issued guidance to clarify its expectations, seeking to support and improve principals’ oversight of their ARs, This guidance covers a principal’s obligation to implement appropriate safeguards, assess the fitness and propriety of individuals at an AR and monitor activities outside the scope of the AR’s appointment.
Additionally, the FCA has confirmed new guidance and rules affirming that principals should:
- 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 orderly wind down; and
- annually review the information they hold on the ARs’ activities, business and senior management – these reviews can be built into existing internal reporting processes. Whilst the FCA has not proceeded with the proposal that each annual AR assessment be reviewed by the principal’s governing body (though it should be conducted by responsible individuals with suitable knowledge and authority, with significant issues being escalated), principals will be required to prepare an annual self-assessment document covering how they meet the requirements of the policy. This self-assessment will need to be signed off by the governing body and made available to regulatory supervisors on request.
The FCA has introduced a transitional period for the self-assessment document, allowing principals up to a year after the rules come into force (ie until December 2023 to prepare the initial assessment and seek approval from their governing body.
The policy statement also references the new final rules published in July 2022 for the FCA’s new Consumer Duty (see our blog post on the Consumer Duty). The Consumer Duty and changes to improve the AR regime go hand-in-hand and reinforce one another in increasing protection for consumers dealing with ARs. Firms will need to consider any changes they need to make to meet the requirements of the Consumer Duty alongside the changes to the AR regime.
Potential areas of further change
The policy statement also sets out views on areas of potential further policy change which the FCA considers could improve the effectiveness of the AR regime and reduce harm, and which were previously highlighted in the earlier consultation. These include:
- the regulatory hosting model and its use in the investment management sector;
- harms and benefits from smaller principals with larger ARs;
- challenges where principals appoint overseas ARs; and
- whether prudential standards should be introduced or enhanced to reflect the harm posed by business models that involve ARs.
In addition, the FCA notes prominently that, whilst its new rules and guidance amend some ongoing obligations for ARs, ultimately the AR regime is drawn from statute and, following its call for evidence last year, HM Treasury will work with the FCA to consider areas of legislative change, including limitations to the scope of activities ARs may conduct, a permission for acting as principal, and the application of the Senior Managers and Certification Regime to principals and their ARs.
The proposed changes are due to take effect on 8 December 2022 following a four-month implementation period. Transitional arrangements have been put in place to allow firms more time to comply with some of the new rules, particularly those requiring them to submit information on an ongoing basis and to review their ARs and self-assess annually.