FCA consultation on the Appointed Representative regime: proposed changes and next steps
On the 3rd December 2021, the Financial Conduct Authority (‘FCA’) and HM Treasury in the UK issued papers seeking industry feedback on proposed changes to the Appointed Representative (‘AR’) regime. The deadline for responses to the two papers is set for 3rd March 2022 and it is expected that the FCA will publish final rules on the back of their consultation paper in the first half of 2022. HM Treasury will consider responses and currently there is no stated expectation of immediate legislative changes.
In this briefing, we set out a summary of the proposed areas of reform with more emphasis on the impacts on Appointed Representatives.
The consultation on the proposed reforms is centred around (i) increasing information requirements from the AR to the Principal and correspondingly, additional information to be reported to the FCA; (ii) more stringent requirements on the Principal in relation to its own infrastructure and resourcing for monitoring ARs. Despite the concerns surrounding the usage of the AR model, the FCA believe that there continue to be benefits to the AR regime, including cost effectiveness, supporting FCA engagement with firms and providing an “incubator model” to allow unauthorised companies to trial new services and products, in turn allowing innovation and healthy competition.
Proposed changes at onboarding stage
In addition to the current information to be provided to the FCA, Principals will now need to file the following additional information on appointing a new AR:
- Primary reason for appointing the AR
- Nature of the regulated activities the AR will undertake
- Non-regulated business of the AR, including:
Nature of the non-regulated business (financial services products or services or non-financial products and services)
Proportion of non-regulated activities to regulated activities in the first year following appointment
- Whether the AR will provide services to retail customers
- Whether the AR operated under a different Principal previously and, if so, why it has moved
- Whether the AR is part of a group and, if so, the name of the parent firm
- Whether any individuals from the AR will be seconded or contracted to the Principal for portfolio management or dealing activities and, if so, the rationale for this
- Information about the financial relationship between the AR and the Principal
- Anticipated revenue from regulated and non-regulated activity for the first year after appointment.
This information must be provided at least 60 days before an AR is appointed, and the FCA public register is proposed to include the specific regulated activity the AR is authorised to undertake. In practice this appears to set a minimum AR onboarding period of at least 60 days. There is also the issue of industry clarity on what constitutes regulated and unregulated activities in order to properly make the disclosure and ensuring proper advice is taken in such matters. Existing ARs are not exempted from disclosing this information and the FCA will set a timeline for such information to be filed.
Proposed changes for ongoing monitoring
Any changes to the information filed at the onboarding stage will need to be notified to the FCA before or within 10 days of such change taking place (depending on the change). In addition, the Principal is required to verify that such information remains current annually, as well as file details of complaints regarding the AR, and details of the revenue streams from the regulated and non-regulated activities of the AR.
The FCA has imposed more specific monitoring obligations on the Principal including:
- Scrutiny of the experience of personnel of ARs for the relevant business, and the time commitment to perform tasks and functions required in the business
- Oversight of the AR to be commensurate with the size of the AR’s business and the specific activities that it undertakes
- Consideration of the control and oversight framework for specific ARs
- Scrutiny of financial and management information
- Recommendation of adoption of a service level agreements to set out clear expectations around escalation of issues
- Consideration of potential risk of harm to the AR’s clients
Most of the above are to be reviewed at least on an annual basis and more frequently where the AR’s business has grown quickly in a short period of time, turnover in revenue or staff is unusually high, or where the AR changes its business model or scope of activities.
Further obligations on Principals
The FCA has set out specific circumstances where Principals should look to terminate the AR relationship including:
- Issues with the AR have not been resolved satisfactorily or within a reasonable time frame
- If senior management turnover at the AR is high and there isn’t a reasonable explanation
- If the AR carries on regulated activity not within the scope of the agreement
- If the AR intentionally misleads its customers in any way
- If any senior manager at the AR Is dismissed for gross misconduct
Additionally, there may be potential further requirements of Principals who are engaging ARs as part of a regulatory hosting business.
HM Treasury’s call for evidence
Separately to the FCA’s consultation, the Treasury is also calling for evidence on the AR regime and is exploring potential amendments that relate to the following areas:
- Changes to the scope of the AR regime
- Enhancing the role of the FCA in relation to the AR regime including potentially requiring an additional FCA permission to undertake a regulatory hosting business
- Placing more regulatory obligations on ARs by extending the Senior Managers and Certification Regime to AR personnel
- Extending the ability of Financial Ombudsman Service to investigate complaints involving activities of ARs including potentially making the
- Principal responsible for all the AR’s regulated activities, even if the AR is acting outside terms of agreement.
Whilst the above proposals are still in consultation stage and subject to change, the direction of travel is clear in that the data collection from the AR and oversight by the Principal will increase. We have seen recently that time frames for the appointment of ARs has lengthened and further enquiries from the FCA on new appointments are more frequent despite the new rules not having been adopted. The changes and increased responsibilities and liability on the Principal is likely to result in an increase in the fees from regulatory hosts for the appointment of ARs. The FCA itself has also since 2021 imposed a £250 annual fee for each AR and there is a requirement to consider the additional risks of the ARs on the calculation of regulatory capital of the Principal.
As a result of these changes, some businesses may seek direct authorisation, but the case for acting as an AR of a specialised regulatory host remains a compelling one. Advantages include:
- No requirement to provide own regulatory capital which is now a minimum of £75,000 or a quarter of previous year’s overheads
- A reputable host will be experienced in the sector in which the AR wishes to conduct business, and can be a great resource on market information and best practice
- Access to specialised expertise on the practical implementation of the regulatory regime relating to the AR’s business
- Relying on a business specifically set up to keep up to date with regulatory changes in the specific sector as opposed to reliance on an internal compliance officer to digest the high volume of regulatory changes affecting the industry.
Current ARs and those businesses considering being appointed as ARs should take stock now to consider how the above proposed changes may change their existing, and proposed plans for personnel and business infrastructure. This should include considering regulated and non-regulated activities and whether the AR model is still the most suitable model for the business and/or whether their current Principal is still a good fit for their business.