FCA moves to tighten appointed representatives regulation

An AR is an organisation or person that runs regulated activities on behalf of another firm, known as a principal, that is directly authorised by the FCA.

Principal firms are responsible for the regulated activities carried out by their ARs.

Announcing its consultation paper (132-page/1.81MB PDF), the FCA said it was “seeing a wide range of harm across all sectors where firms have ARs”, because principals often “don’t perform enough due diligence before appointing an AR, or from inadequate oversight and control after an AR has been appointed”.

Proposed changes to the regime would require principals to provide additional and more timely information on their ARs and how they are overseen, such as its revenue and details of any complaints against it.

Principals would also have to notify the FCA of a proposed AR appointment at least 60 calendar days before the appointment takes effect.

There are around 40,000 ARs operating under around 3,600 principals in the UK.

According to the FCA, the number of ARs can vary significantly from firm to firm, with some operating hundreds - or even thousands – at a time.

The FCA said the reforms would allow it to “more easily identify potential risks within principals and ARs” and “better assess whether the principal has the expertise, systems and controls to effectively oversee its ARs”.

Elizabeth Budd, financial services expert at Pinsent Masons, said: “The statistics used for the FCA in the consultation paper underline why the regulator feels the need to intervene in order to reduce risk to consumers.”

“The AR regime was created with a particular purpose in mind, but innovation has taken the regime and expanded it to a position where is rightly deserves review. Whilst there are many principals who fully comprehend their obligations and run robust operations, unfortunately there are too many examples where ARs have not been properly supervised,” she said.

“The major benefit of the AR regime is that is allows a relatively cost-effective way to operate within the Financial Services and Markets Act regime without the huge expense of being directly authorised. It allows those considering setting up a new business to develop experience and credibility under the hosting option and to test their business model before committing to full authorisation.”

“Whilst in some ways a more robust regime is to be welcomed, care does need to be taken that the additional data gathering, due diligence and monitoring does not reduce the benefit of the regime The proposal to publish the final rules in the first half of 2022 with certain data submitted to the FCA within two months of implementation may, for those with significant numbers of ARs, be a considerable burden,” Budd added.

The FCA’s consultation closes on March 3, 2022.