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 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.
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.
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.