How the new AR regime could pose challenges for firms

Principal firms and their ARs now have just four months to meet new requirements on information and reporting. 

Why is reform needed?

Following thematic reviews in the insurance and investment management sector, the Financial Conduct Authority has identified wide-ranging cross-sectoral failings where the AR model operates. The FCA’s data analysis established that on average principals generate significantly more complaints and supervisory cases than directly authorised firms.

In the FCA’s view, this harm generally stems from principals failing to carry out enough due diligence into prospective ARs prior to appointing them, and then failing to properly oversee and control ARs once appointed. 

The new rules will clearly impose more onerous obligations on principals prior to appointing ARs.

The FCA’s efforts to address this harm include recent enforcement action resulting in restitution payments to affected customers of nearly £400,000. The FCA has also issued a number of thematic findings publications, as well as ‘Dear CEO’ letters.

The FCA’s concerns have culminated in a policy statement (PS22/11) introducing a package of information and notification requirements for principals. The measures are aimed at enabling the FCA to easily identify potential risks within the principal’s and AR’s relationship.

The new requirements will also help the FCA assess whether a principal has the appropriate expertise, systems and controls, and resources to effectively oversee its ARs.

What will happen once the rules come into force?

Currently, principals’ core regulatory obligations are set out in chapter 12 of the FCA’s Supervision Manual (SUP 12). The chapter is not highly prescriptive and focuses its content on defining the different parties involved in AR arrangements.

PS22/11 will elaborate and clarify the FCA’s expectations as well as introduce new obligations on principals by enhancing the SUP 12 provisions.

Once the rules enter into force, the FCA intends to make a data request to all principals with active ARs or introducer appointed representatives, requesting detailed information on their existing AR/IAR arrangements within 60 days. This information will include: 

• The primary reason for the appointment of the AR;
• Any financial non-regulated activities the AR carries out; and
• Whether the AR was previously an AR of a different principal and, if so, why they are now operating under a new principal.

The FCA will likely use this information to benchmark and obtain a deeper understanding of the activities of individual ARs in the sector. This information will also be used as a reference point for future assessments of the individual ARs going forward.