PS22/11: Improvements to the Appointed Representatives Regime

Background

It is estimated that there are currently around 3,400 principals with around 37,000 Appointed Representatives (ARs), including introducer ARs (IARs). From 2018 to H1 2019, principals and ARs accounted for 61% of the value of Financial Services Compensation Scheme #FSCS claims, which totalled ￡1.1bn during this period. On average, principals are the source of 50 to 400% more supervisory cases and complaints than non-principals (other directly authorised firms), and supervisory cases were higher for principals across all sectors (general insurance?protection; investment management; retail investments; retail lending and wholesale financial markets).

In 2021 the Treasury Select Committee (TSC) published a report on ‘Lessons from Greensill’. The report made a recommendation for the FCA and the Treasury to consider reforms to the AR regime with the aim of limiting its scope and reducing opportunities for misuse. The Financial Conduct Authority #FCA will be working closely with the #Treasury following on from the Treasury’s call for evidence.

Firms should also be aware of the Consumer Duty (the Duty), for which?final rules and guidance?were published in July this year. The Duty sets a new, higher standard of care that firms should give to consumers in retail financial services markets. This goes hand-in-hand with some of the changes to the AR regime. Principals and ARs should consider how the Duty applies to them.

Key points

Overall Aim:

• Greater engagement by the FCA with, and scrutiny of, firms as they appoint ARs which is applicable to both new applicants and firms already authorised; with targeted supervision of principal firms across the whole financial services sector whist using improved data and analytical tools to focus their work. The introduction of a new fee that principals must pay for each of their ARs will help fund the FCA’s work in this area.
• Helping to achieve the FCA’s Objectives of consumer protection, market integrity and effective competition.

The FCA is seeking the following outcomes:

• Principals understand their responsibilities in relation to ARs, have stronger and better oversight of, and take more effective responsibility for, their ARs.
• The FCA are able to better challenge firms which have already appointed, as well as those looking to appoint, ARs.
• Principals address issues with their ARs that are, or have the potential to, cause harm to consumers or markets.
• Consumers can access better?quality information on principals and ARs and makegood decisions when choosing products or services.
• To alleviate the issue of currently limited information required from principals relating to their ARs.

Data required from principals on ARs:

• The primary reason for the principal’s intention to appoint the AR
• The nature of the regulated activities the principal will permit the AR to undertake (primary and additional markets in which the AR will undertake regulated activity)
• Whether the AR will provide services to retail clients
• Whether the AR is part of a group. If so, provide the name of the parent undertaking(s)
• Whether any individuals from the AR will be seconded or contracted to the principal firm to carry on portfolio management and/or dealing activities, and if so, explain the rationale for entering into such an arrangement
• Whether the AR was previously an AR of a different principal, and if so, why the previous relationship was terminated
• Information about the nature of the financial arrangements between the principal and the AR
• Non-regulated business of the AR
• The nature of the non-regulated business (financial or non-financial services activity)
• The proportion of the non-regulated activities compared to the regulated activities in the first year following the appointment
• Anticipated revenue from regulated and non-regulated activity during the first year of appointment.

Information requirements about the nature of the financial arrangements and other significant points of note between the principal and the AR:

• Information on non?regulated activities
• Estimations of revenue in the first year of appointment
• Reporting significant changes
• Pre?notification for new AR appointments
• Verifying AR details
• More details about the AR activities on the FS Register
• Clarifications in relation to complaints and revenue reporting
• Notification in relation to regulatory hosting services

Summary of the final rules on AR data and notification:

• The need to explain the ARs business model
• Principals to verify AR details
• Principals to provide complaints data on their ARs
• Principals to provide AR revenue information
• Clarifications in relation to complaints and revenue reporting
• Notification in relation to regulatory hosting services

Responsibilities of principals and the FCA expectations:

• Clarifying principals’ responsibilities for their ARs and FCA expectations
• ARs providing functions or tasks for principals
• Fit and proper expectations for principals
• Strengthening the expectations of firms to monitor activities outside the scope of appointment
• Overseeing ARs effectively
• Monitoring appointed representative growth
• Overseeing ARs to a comparable standard as if they were employees of the principal
• Effectively recognising, and limiting, the risk of harm
• Annual review of ARs activities and business and of fitness and propriety of senior individuals within the AR
• Termination of AR contracts and winding down
• Self?assessment (Documentation required explaining how the rules are followed).
• The Consumer Duty final rules published in July 2022
• Cost benefit analysis
• Potential #SMCR obligations.

It should be noted that all the above are represented in the changes to The Appointed Representatives Instrument (please see link below to the Policy Statement and the AR Instrument).

The Future

Whether you are a principal, an AR or intend to appoint an AR, these rules represent a seismic change in responsibilities and understanding for all. With the clock ticking, the new rules come into effect on 8 December 2022.?From that date, principals and ARs have 60 days to ensure they are implemented.

Firms should not think that this is where their responsibilities end. As mentioned above there is a correlation between the new AR rules and other major new initiatives impacting other sections of the FCA rulebook, particularly in relation to the New Consumer Duty,?the Financial Promotion Rules and SM&CR.?These areas on their own are extensive and if Principals and ARs are not familiar with these obligations, then whole new areas will need to be examined and understood by those firms.

In addition, principals can expect to receive a request for Data through a Section 165 request later in 2022.

?Xcina Consulting can help your firm prepare for the implementation of the new AR rules and the ‘knock on’ effect with regard to other rules and obligations. To reiterate, firms need to comply within 60 days of the rules coming into effect on 8 December 2022. It is time to start preparing now.

Please contact Xcina Consulting for any help you may require as to all your regulatory needs.

View further information on the?new AR rules.