What are the key rule changes the FCA has made on ARs?

All firms authorised by the Financial Conduct Authority are permitted to have unregulated firms, known as appointed representatives, carrying out regulated business under their supervision and using their regulatory permissions. 

The use of ARs is a common business model, particularly for financial advice, insurance sales and credit broking, meaning the AR can offer certain financial services or products under the responsibility of an authorised firm (known as the principal). 

According to HM Treasury’s call for evidence issued in December 2021, there were approximately 40,000 ARs operating under around 3,600 principal firms. This system has long been a cause of concern for the FCA, with many principal firms lacking the resources and expertise to oversee their ARs effectively.

The FCA continues to pour a considerable amount of energy into transforming itself into an assertive, front-footed regulator.

The FCA has recently stated that ARs account for more than 60 per cent of the total value of recent claims to the Financial Services Compensation Scheme, and generate up to 400 per cent more supervisory cases and complaints than other directly authorised firms. 

The FCA continues to pour a considerable amount of energy into transforming itself into an assertive, front-footed regulator, which prioritises the protection of consumers.

It is in this context that the FCA confirmed last year that one of its key organisational priorities is to mitigate the key risks inherent in the AR regime and to strengthen its regulatory grip over this particular business model.

Principal firms will now need to bear in mind numerous additional obligations that are likely to significantly increase the compliance burden on them.

Central to this is a series of new rules that came into effect on December 8 2022. These new rules were set out in the FCA’s policy statement (PS22/11) and were imposed by way of amendments to chapter 12 of the supervision module of its handbook (SUP 12). 

It is important to recognise that nothing in these rules changes the overarching requirement that principals must properly supervise the activities of their ARs and that they ultimately bear responsibility for their acts and omissions.

However, under the new rules, principal firms will now need to bear in mind numerous additional obligations that are likely to significantly increase the compliance burden on them.

Below are some of the key changes – please note, however, that not all of these apply to a sub-category of AR called the introducer appointed representative (IAR), a type of AR whose scope of appointment is limited to effecting introductions.  

Pre-appointment assessment

Before a principal firm appoints an AR – and on a continuing basis – it must satisfy itself as to a number of conditions.

These include that the appointment does not prevent the principal firm from satisfying the FCA’s threshold conditions, and that it has adequate controls and resources in place to monitor the regulated activities of the AR. The full list of requirements can be found in SUP 12.4.2 R. 

The principal must also assess whether a potential AR is suitable to act for it in that capacity and should also consider the fitness and propriety (including good character) and financial standing of the controllers, directors, partners, proprietors and managers of the AR. More details are found in SUP 12.4.4 G and 12.4.4A G.

Notification requirements

Principal firms are subject to an increased number of reporting obligations in relation to their ARs.

New guidance in SUP 15.3.7 G, makes clear that principle 11 – which requires a firm to deal with its regulators in an open and co-operative way and to disclose to the FCA appropriately anything relating to the firm of which the FCA would reasonably expect notice – now includes the activities of any ARs.

In practice, this is likely to increase the frequency of notifications made by principal firms to the FCA and, by extension, may also increase the potential enforcement risk for firms that fail to make reports when required.  

Pre-appointment notification

One particularly significant change in these new rules is the requirement that, where a firm intends to appoint a new AR, it must now provide notice to the FCA 30 calendar days in advance of the appointment taking effect. 

Although this is still a notification, and not an application, in practice the FCA is effectively being given the opportunity to consider the proposed relationship and, if it has concerns, to take action.

The FCA is being given more scope than it previously had to object to any changes.

This could involve interrogating the principal on its level of due diligence or, in cases where the FCA’s concerns are particularly serious, it could seek to use its powers of requirement to prevent the application taking effect at all. 

The required content of this notice is set out in SUP 12.7.2 G: as well as the name of the AR and the individuals responsible for its management, the notice must, among other things include the main reason for the appointment, any financial relationship between the parties and whether the AR has ever had a different principal and, if so, why that previous relationship was terminated. 

For new appointments, the "add an AR or tied agent form" found on Connect should be used.

On occasion, the FCA may also issue statutory information requirements (as it did between December 8 and 12 2022) requiring principal firms to provide specific information on their ARs.

In addition, the principal must also report any changes to the types of regulated activities an AR will conduct at least 10 calendar days before those changes take effect.

These rules do not replace but rather supplement the existing standards applicable to principal firms.

Again, the effect of this is that the FCA is being given more scope than it previously had to object to any changes which it considers to be inappropriate. 

Post-appointment notification

Once an AR has been appointed, the principal firm becomes subject to a number of further reporting requirements, including:

• Complaints data: Principals must submit complaints data for all their ARs (including the numbers of complaints relating to each of the ARs) on an annual basis (SUP 12.7.9D R). A new form ("on-going reporting by principal firms on their appointed representatives”) has been provided for this purpose in annex 6R to SUP 12.
• Revenue data: Principals must also submit revenue data for each of their ARs on an annual basis (SUP 12.7.9D R).
• Annual verification: Principals must annually verify the accuracy of the details about themselves and their ARs, which are held on the financial services register (SUP 16.10.4 R). As well as reporting any changes to the FCA, principals should actively confirm which details remain accurate. 

Other key responsibilities of principals

In addition to the new standards described above, the rules set out a number of further obligations on principal firms, including:

• Ensuring that appropriate safeguards are in place where they delegate functions or tasks to an AR (SUP 12.6.5B G). Specifically, they must ensure that any delegation does not represent a conflict of interest and is subject to enhanced monitoring.
• Assessing the senior management at ARs for competence and capability – in this regard, they should consider the practical guidance found in SUP 12.4.4 G.
• Closely monitoring and ensuring that ARs act within the scope of their appointment (SUP 12.4.4 G).
• Ensuring (on appointment and on an ongoing basis) that the activities an AR carries on do not, or would not, result in an undue risk of harm to consumers or market integrity (SUP 12.4.2 R).

In addition, and in terms that are consistent with the general approach of these new standards, in policy statement 22/11, the FCA also confirmed that principals should oversee ARs to a comparable standard as if they were an individual directly employed by the principal and carrying out regulated activities in-house. 

Next steps

The FCA has described these changes as important to help principals manage their ARs better and ensure that they provide the oversight needed to avoid consumers being mis-sold or mis-led and to make sure markets can operate safely and fairly.

Clearly, the new rules significantly enhance the oversight obligations and compliance burden on principal firms.

As an initial step, firms with existing ARs should consider undertaking a gap analysis to identify any weaknesses in their current AR onboarding and oversight frameworks.

The increased notification requirements on principal firms is perhaps the most significant change in this package.

As part of this, firms will need to ensure that they have appropriate means of satisfying themselves as to the suitability and competence of any ARs – both existing and proposed – and in practice will need to consider these issues much more closely than at any time before.

Firms may also need to consider whether any contractual documentation they routinely use remains suitable in light of the new rules. 

Moreover, these rules do not replace but rather supplement the existing standards applicable to principal firms.

Given the FCA’s close scrutiny of this sector, firms should also consider whether their pre-existing AR systems and controls, including their insurance arrangements, are appropriate and, if not, to make any necessary changes to ensure compliance. 

The increased notification requirements on principal firms is perhaps the most significant change in this package.

Looking further ahead we would expect there to be an uptick in enforcement activity for principals.

These enhanced requirements are clearly aimed at providing the FCA with more data than ever before (which is consistent with its public commitment to becoming a data-led regulator) and it seems the FCA is positioning itself to be able to block proposed appointments and also to require the termination of existing relationships where there has been a breach of rules or where it considers that an AR poses a risk to consumers or markets. 

While the immediate impact of these new rules is likely to be in a supervisory context for principal firms, looking further ahead we would expect there to be an uptick in enforcement activity for principals, and firms should be prepared for this eventuality.

This article was first published in the FT Adviser on 7 February 2023.

FURTHER INFORMATION

If you have any questions regarding the blog above, please contact James Alleyne or a member of our Criminal team.

 

ABOUT THE AUTHORS

James Alleyne is Legal Counsel in the firm’s Financial Services Group. He advises clients on the full spectrum of financial services and FCA-related matters, including on authorisation applications, perimeter and supervisory issues, enforcement investigations and cases before the Regulatory Decisions Committee and Upper Tribunal.