On 3rd August, the Financial Conduct Authority (FCA) published a Policy Statement (PS22/11) setting out the final rules for the Appointed Representative (AR) regime, which aims to enhance consumer protection and help protect financial markets. The Policy Statement follows on from the FCA’s consultation (CP21/34) launched in December 2021 on the AR regime, building on previous thematic reviews undertaken by the FCA across the investment and insurance sectors in 2018 and 2019.
The new rules come into effect from 8th December 2022, and will apply to all firms who currently have ARs, firms that intend to enter into AR relationships in the future, and ARs themselves.
What is an Appointed Representative (AR)?
An Appointed Representative or AR is a firm or person who carries on certain regulated activities under the responsibility of an on behalf of a directly authorised firm which holds the relevant regulatory permissions. The authorised firm which has appointed and is responsible for the AR is referred to as the principal. Firms or individuals generally become an AR so that they are empowered to carry out regulated activities and therefore gain access to a regulated market in a more cost-effective way than becoming directly authorised themselves.
ShareIn acts as regulatory Principal for five firms, as indicated on the FCA Register. This means that we are responsible for maintaining appropriate oversight of our AR firms and ensuring that they remain compliant with FCA regulation.
Why is the FCA making these changes?
The FCA’s thematic reviews of the industry have highlighted failings in the sector where the regulator has found that principal firms have not performed sufficient due diligence before appointing an AR, and that in some cases appropriate ongoing control and oversight of ARs is not being undertaken by principals. In an effort to reduce potential harm to consumers (also a key focus of the FCA’s new Consumer Duty announced last month, which aims to ensure good outcomes for retail consumers), the FCA has brought in new requirements for the AR regime to enable the regulator to identify potential risks within the regime.
What are the changes?
The AR regime is set out in the legislative framework for the regulation of financial services, overseen by HM Treasury, and the core obligations to principals are currently set out in chapter 12 of the FCA’s Supervision Manual (SUP 12). PS22/11 adds new obligations to the SUP 12 provisions and clarifies the regulator’s expectations of principal firms.
When the new rules come into force in December, firms will need to respond to a data request from the FCA within 60 days providing detailed information on their existing AR arrangements, including why they appointed the AR, details on financial non-regulated activities undertaken by the AR, and whether the AR was previously the AR of another principal (and why they have switched to a new principal if so).
Appointing new ARs
Under the new rules, a more robust assessment of a prospective AR must be undertaken and demonstrated by a principal firm prior to the appointment. This will include checking the competence and capabilities of key individuals at the AR firm, risk-assessing the AR’s business model and governance arrangements, and ensuring the principal has adequate resources and controls to effectively oversee the AR. Principal firms also need to ensure that they proactively follow up with the prospective AR where they have concerns about the appointment.
AR appointments must be notified to the FCA no later than 30 days before the appointment takes effect, and the principal must provide the FCA with details of any non-regulated business conducted by the AR as well as an estimate of the AR’s revenue in the first year of business.
Once an AR has been appointed, principals will need to conduct an annual review of the AR relationship and complete a self-assessment of the firm’s compliance with regulatory expectations (to be signed off by the board or governing body). A review of the AR arrangements will also be triggered by significant changes such as a new business model or scope of activities conducted by the AR or a high volume of complaints related to the AR. Data on complaints against ARs in respect of regulated activities will also need to be reported annually to the FCA, as well as ARs’ annual revenue.
In terms of ongoing monitoring of ARs, principal firms will need to take “reasonable steps” to ensure that ARs are only carrying out the prescribed activities and report any changes of the ARs’ details to the FCA. Principal firms must maintain written records of all reviews of ARs and all self-assessments of the firm’s compliance with FCA expectations for six years.
The new rules also set out the regulator’s guidance on situations where termination of an AR appointment might be the best course of action, such as where the growth of an AR’s business means that the principal can no longer effectively oversee the business.
Together with the Consumer Duty and the policy statement on strengthening financial promotion rules for high risk investments (PS22/10) also released this month, the FCA is raising the bar significantly for regulated firms. As a directly authorised and regulated firm in this space, ShareIn supports the regulatory objectives of enhancing consumer protection and ensuring good outcomes for retail consumers, and the responsibility that this entails of AR arrangements such as those carried out by ShareIn as a regulatory principal.