FCA proposes stronger requirements on oversight of the Appointed Representative regime

In December 2021, the Financial Conduct Authority (FCA), released Consultation Paper (CP) 21/34 on ’Improving the Appointed Representatives (AR) Regime’. This CP was released in the context of the Treasury’s ’call for evidence’ paper (also released in December 2021) on how market participants use the AR regime, how effectively the regime works in practice, potential challenges to the safe operation of the regime and possible future reforms.

The AR regime was introduced through primary legislation in 1986. An AR is a firm or person who carries on regulated activity on behalf, and under the responsibility of, an authorised firm (the principal). When appointing an AR, the principal assumes responsibility for the regulated activities the AR carries on.

The reforms were initiated after the well-publicised collapse of Greensill Capital (Greensill) and David Cameron lobbying scandal in 2021 – Greensill being an AR rather than directly authorised by the FCA brought the AR regime significantly into the spotlight.

CP21/34 is consulting on two main areas of change:

1. Additional information on ARs and notification requirements for principals to allow the FCA to identify potential risks more easily within principals and ARs. It will also help assess whether the principal has the expertise, systems and controls to effectively oversee its ARs and to target supervisory interventions more effectively.
2. Additional guidance for principals on their responsibilities, and how they should act and oversee their ARs which will clarify and strengthen the responsibilities and expectations of principal firms.

More specific areas of change within the regime that are proposed are:

• Principal firms would be required to submit data on complaints against their ARs on an annual basis. The data would be required to be submitted per AR and not as an aggregated number of complaints across all ARs, which is currently the case;
• The FCA is proposing to extend the requirement for principal firms to attest to the accuracy of basic details held on their ARs on an annual basis or report any changes. This would bring the rules in line with directly authorised firms who currently attest their details are correct via the FCA Connect system annually. The details would include the activities the principal permits ARs to conduct, with any changes during the period required to be notified to the regulator using an appropriate form set out in SUP 12;
• The FCA proposes to require principals to submit revenue data for each of their ARs, from both regulated and non-regulated activities. For existing ARs, it is proposed that principal firms provide this information annually based on their accounting reference date, with 30 working days in which to submit the return. Principals would report this using a new AR reporting form and a transitional period would apply for existing ARs so that principals provide this information for the first full year of data following the rules coming into effect.For ARs appointed after the new rules are implemented, it is proposed that principal firms provide actual figures (for example, for non-regulated business, or if regulated business was conducted under a different principal).If the data is not available, particularly when a new AR is set up and there are no revenues yet, the principal would provide a projection of the annual income of the AR (both regulated and non-regulated) at the point of appointment; and

• The FCA proposes principals notify the regulator of an intention to begin providing regulatory hosting services and to require existing principal firms to notify the FCA if they already provide regulatory hosting services. The principal would need to make this notification at least 60 calendar days before starting to provide regulatory hosting services to allow the FCA time to assess the firm.

HM Treasury – the AR regime: call for evidence

Also in December 2021, HM Treasury released a ’call for evidence’ paper on the regulatory framework for ARs where it acknowledges that the Government, at the time the AR regime was introduced (in 1986), did not expect it to become so widespread, with the initial intention to just be for salespersons to promote and introduce customers to the principal firm. Today, there are more than 40,000 ARs and over 3,600 principal firms within a wide range of financial markets.

This call for evidence, issued in parallel with the FCA’s consultation paper, is designed as an information gathering exercise on how market participants use the AR regime and how effectively the regime works in practice. The Government wants to ensure it has a full and up-to-date understanding of how the AR regime is currently used. The call for evidence is also designed to gather views on potential challenges to the safe operation of the AR regime and possible future reforms that might be considered to address those challenges. The Government’s view is that more evidence is required before it can decide whether legislative reform, in addition to the rule changes the FCA proposes to make, is necessary.

Future changes being considered by the FCA to further strengthen the requirements within the AR regime are:

• Limiting the maximum size of ARs before requiring them to become fully authorised in their own right;
• Prohibiting the engagement of ARs which operate businesses that are materially distinct from that of the principal;
• Limiting the range or scope of regulated activities that regulatory hosts can oversee and/or the number of ARs they can have;
• Requiring principals to regularly review the relative size/scale of business carried on by their ARs and consider whether it remains appropriate; and
• Principals are to be required to ensure that their contractual arrangement with an AR allows for termination where a principal considers it can no longer adequately oversee the AR.

Overall, the FCA’s aim is to address the perceived harm in the market while retaining the cost, competition and innovation benefits that the AR model provides. The proposed reforms have a basic goal of allowing the FCA to ’more easily identify potential risks within principals and ARs’ and ’better assess whether the principal firm has the expertise, systems and controls to effectively oversee its ARs’, rather than completely overhauling the AR model or even terminating the option for firms to become ARs at principal firms.

Should you wish to discuss any of the above in more detail, please do not hesitate to contact Gary Allan at ‘gary@complycraftconsulting.com’, Compliance Consultant at ComplyCraft Consulting Ltd.