Appointed Representatives and Introducer Appointed Representatives
We are often asked whether a person or company needs to be FSA authorised when they provide an “introducing” based financial service. The answer, of course, depends on the scope of the activities being carried out and has recently been “clarified” somewhat by FSA. In this article the person or company performing the service is referred to as an “Introducer”.
“Introducing” and “Arranging”: The Law
Introducing is not itself a regulated activity. This is commonly misunderstood because there is an exemption (available in limited circumstances) to the regulated activity of “Arranging” called “Introducing”. Therefore, whether an Introducer must be regulated will normally depend on whether or not it provides arrangements caught under Article 25 of the Financial Services and Markets Act 2000 (FSMA) (Regulated Activities) Order 2001 (RAO). Article 25 RAO is called “Arranging deals in investments” and is commonly described as follows:
- “Bringing About”: Making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a particular investment... (article 25(1)); or
- “Making Arrangements”: Making arrangements with a view to transactions in investments... (article 25(2)).
The first limb of arranging (article 25(1) “bringing about”) therefore requires that the arrangement directly brings about a deal.
The second limb of arranging (article 25(2) “making arrangements”) is however potentially much wider as it does not require that the arrangements would bring about particular transactions. The scope of article 25(2) is considered to be notoriously uncertain and the FSA has traditionally taken a broad view of its extent. It was considered in more depth last year following a court case and the consequential amendments to FSA guidance which followed.
The “Arranging” Court Case (Watersheds Ltd v (1) David Da Costa (2) Paul Gentleman  All ER (D) 140 (Feb))
The background to this court case was as follows. Real Creative Group Limited (RCG) employed Watersheds Limited (Watersheds) to help RCG raise finance of around £1 million and to co-ordinate discussions between prospective funders and RCG. Watersheds were unable to obtain the required funding. Around the same time (and due to other financial pressures) RCG went into administration. Following RCG’s administration Watersheds attempted to reclaim fees in accordance with the terms of the agreement entered into between them. In response to this claim RCG issued a counter claim arguing (amongst other matters which will not be looked at for the purposes of this article) that the agreement was not enforceable because Watersheds had been carrying out a regulated activity without being authorised to do so. Under section 26 of FSMA “An agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party”.
In considering whether section 26 of FSMA applied, the main issue considered was whether the activities carried out by Watersheds fell under the scope of articles 25 (1) and 25(2) of the RAO. More specifically, whether Watersheds made arrangements for another person to buy, sell or subscribe in an investment (it was accepted that the activity was in the course of business and involved a regulated product (the potential sale of shares)).
In considering article 25(1) the judge was influenced by FSA’s perimeter guidance, “PERG” which was that Watersheds’ activities could not be caught under this limb as the activities could not have the direct effect of concluding a particular transaction. In deciding whether Watersheds were carrying out an article 25(2) activity the judge relied on the then guidance in PERG (2.7. 7B), without which he “would have been inclined to think that Article 25(2) did apply to Watershed’s activity in seeking to assist the company to raise equity finance”. This is because PERG 2.7.7B (as it was drafted) placed emphasis on the provision of facilities by the Introducer, such as “exchanges, clearing houses and service companies”. Watersheds were clearly not providing such services. The judge’s interpretation of article 25(2) therefore leant heavily on the limited guidance given in PERG and by stating that he would have found that Watershed’s activities amounted to arranging had it not have been for the guidance, the judge interpreted PERG as excluding activities which it does not mention. The guidance, however, only covered the easy or obvious examples. Accordingly, it followed that article 25(2) appeared to be limited to facilities which involve the provision of activities, as opposed to assisting a party. This was a far narrower activity than practitioners had understood it to be and that FSA had intended it to cover.
Subsequent FSA amendments to PERG
FSA’s views in relation to the decision in Watersheds can be demonstrated by the commentary in the revised PERG guidance that followed the decision: (PERG 2.7.7BD)
“... It appears to the FSA that the judgement should be considered in the light of the case to which it relates ... FSA remains of the view that article 25(2) of the Regulated Activities Order includes certain types of arrangements for making introductions whilst recognising that the judgement in the Watersheds case introduces an element of doubt.”
The highlighted wording may be viewed as FSA code for noting that RCG were not legally represented in court and the first line indicates that the FSA wants the decision to be consigned to history and the specific facts to which it related. Accordingly, the FSA’s amendments to PERG 2.7. 7B aimed to clarify their understanding of the activity of “making arrangements with a view to transactions in investments”. In order to avoid any confusion moving forward the list of activities which will definitely constitute this activity (previously detailed as “exchanges, clearing houses and service companies”) has been replaced with a much broader definition (PERG 2.7.7B G):
“… The activity of making arrangements with a view to transactions in investments is concerned with arrangements of an ongoing nature whose purpose is to facilitate the entering into of transactions by other parties. This activity has a potentially broad scope and typically applies in one of two scenarios. These are where a person provides facilities of some kind:
- to enable or assist investors to deal with or through a particular firm (such as the arrangements made by introducers); or
- to facilitate the entering into of transactions directly by the parties (such as … exchanges, clearing houses and service companies…).”
FSA also deleted the words that could be read as implying that the article 25(2) activity must be sufficient to ensure that the transaction is brought about (they have removed the words “aimed at cases where it may be said that the transaction is ‘brought about’ directly by the parties” and replaced them with the broader words “arrangements... whose purpose is to facilitate”).
So where do the rules leave us?
It appears from the new guidance that a distinction must be made between the actions of the Introducer simply making an introduction (for remuneration or otherwise) and an Introducer making arrangements following the introduction. In the latter case it is clear that the FSA believes the Introducer would have crossed the line into regulated territory and must be authorised or otherwise exempt. Unfortunately, the “new” guidance does not go into great detail as to where the distinction between making introductions or introducing (which are not regulated activities) and “arranging” should be drawn.
Although the situation is still slightly unclear, it is our view that it is not the nature of being an Introducer that is relevant to the activity of arranging, but what actions are carried out during and after the introduction. The FSA clearly does not want to have a situation whereby a corporate finance house could claim that it was not carrying out the regulated activity of “arranging” when helping to find investors in relation to a typical fund raising. Conversely, it is not correct to say that an Introducer will definitely be “arranging” simply by putting a potential investor in touch with a company seeking finance (or Vice-versa). In order for this to be a regulated arrangement, the Introducer would have to do more than effect a mere introduction and would need to provide “facilities of some kind” (for example structuring the transaction or being involved with putting together the documentation needed to enter into the transaction). This is clear from the guidance at PERG 2.7.7B G(l) which states: “to enable or assist investors to deal with or through a particular firm (such as the arrangements made by introducers).” By saying “such as the arrangements made by introducers” FSA is acknowledging that not all Introducers will make such arrangements.
An “Introducer” who markets another company’s services (share dealing for example) or an investment opportunity. Such an Introducer may also advertise products or opportunities on a website or through emailing contacts.
The activities of the Introducer in this example may not constitute the regulated activity of arranging and therefore the Introducer will not need any form of FSA authorisation. This is because although the Introducer is making introductions, such activities will not directly effect a particular transaction (article 25(1)) and we have no information to suggest that the Introducer’s activities will be of an ongoing nature that facilitate any subsequent transaction (article 25(2)). Accordingly, such an Introducer will not, on the face of it, be “arranging”. It should be noted that when an Introducer directly corresponds with contacts, or gives a seminar to promote a firm’s services (for example) it must make sure it does not carry out the regulated activity of advising on investments (which is not covered in this paper). It is also paramount that the Introducer does not go on to make arrangements for that client to deal with the regulated entity or in relation to the investment opportunity by, for example, helping them to fill in forms. (This paper also does not consider the “financial promotion” rules that the Introducer would need to consider).
An Introducer who carries out the following activities:
- distributing account opening forms to clients physically (rather than by display on a website);
- collecting account opening forms (and supporting documentation) and submitting these to the relevant regulated firm;
- providing a first port of call for potential clients in relation to any questions that they have about a regulated firm’s services;
- placing trades (execution only) for clients pursuant to a power of attorney;
- chasing potential contacts who have shown an interest in the potential investment activity but have not followed this up.
A. This activity is unlikely to amount to arranging, however, the financial promotion rules will apply in relation to the documents distributed and the persons to whom these documents are communicated.
B. Activity (b) will probably require FSA authorisation if the Introducer helps the client complete the forms although merely collating the forms may not require authorisation where no further service is offered (see PERG 5.6.8 for related guidance).
C and D. The activities described by (c) and (d) would almost certainly constitute a regulated activity. In undertaking such activities the Introducer would be almost certain (in respect of (c)) and certain (in respect of (d)) that a transaction would take place which would not take place without their involvement. Activity (c) would therefore constitute the activity of article 25(1) or (2) (“bringing about” or “making arrangements”) depending on the actual facts in a particular circumstance. Activity (d) would almost certainly involve providing the activity of article 25(1) (“bringing about”).
E. This activity is likely to constitute the activity of article 25(2) (arranging “making arrangements”). The amended PERG guidance expressly states that arrangements of an ongoing nature subsequent to an introduction are likely to constitute arranging.
To permit an Introducer to undertake certain regulated activities, a regulated entity may appoint the Introducer as its Appointed Representative (AR) or as an Introducer Appointed Representative (IAR).
An Introducer may be exempt from the requirement to be authorised to carry out a regulated activity if he is an AR (as detailed in section 39 FSMA) of a regulated entity. An AR is allowed to carryon certain regulated activities by an authorised firm (the “Principal”) under a contract by which the Principal accepts responsibility for the regulated activities carried on by the AR. The activities which an AR can carry out are detailed in the FSA’s Supervision Handbook (SUP) at 12.2.7G. The AR may only carry out regulated activities for which the Principal has authorisation (including “arranging”) but these activities do not include dealing as a principal or dealing as an agent.
The FSA rules in relation to IARs (as opposed to ARs) may be found at SUP 12.2.8G. An IAR is exempt from regulation, other than having to be included on the FSA/s register as being associated with the Principal. An lARs scope of appointment must (under SUP 12.5.7 R) be limited to:
- effecting introductions to the Principal; and / or
- distributing non-real time financial promotions which relate to products or services available from or through the Principal.
Taking the above into account, the table below may assist as a quick reference in determining what level of authorisation an Introducer may require:
Click here to view image