New rules will come into force on December 8 2022, bringing in two key areas of change for the UK’s appointed representatives regime.
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 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.
However, our expectation is also that information will be used to initiate supervisory activity where the FCA identifies shortcomings against the new requirements. This is in line with the FCA’s recent more aggressive approach to supervision aimed at minimising foreseeable consumer harm and preventing poor consumer outcomes.
What will principals need to do before appointing ARs?
Under current rules, when assessing prospective ARs prior to their appointment, principals are broadly required to assess the impact on threshold conditions, solvency of the AR and the general adequacy of systems and controls.
From December 8 principals will need to ensure they:
- Accurately assess the competence and capabilities of key individuals. The principal should be checking if they have the relevant experience, knowledge, skills and training to carry out business on behalf of the principal. The principal should also be satisfied that the relevant individuals can devote enough time to performing their tasks.
- Thoroughly risk-assess the AR’s business model and governance arrangements and consider the likely client, service continuity and reputational impact of any risks crystallising.
- Ensure that the principal firm has adequate controls and resources for effective oversightof the AR, commensurate to the AR’s size and the nature of the regulated activities the AR will conduct. This includes making sure any delegated functions or tasks will not create a conflict of interest and are subject to enhanced monitoring. The level of AR oversight by the principal needs to be equivalent to the oversight that would apply were the principal to be conducting the regulated activities directly.
- Proactively follow up with the prospective AR where concerns are identified.
- Promptly notify the FCA of proposed AR appointments 30 days before the appointment takes effect.
- Provide the FCA with information on the non-regulated business an AR conducts, including whether the non-regulated products or services are financial or non-financial in nature, and what the non-regulated activity is.
- Provide the FCA with an estimate of the AR’s revenue in the first year of business.
The new rules will clearly impose more onerous obligations on principals prior to appointing ARs. Appointing ARs will change from a minor administrative activity to a decision that will require greater senior management engagement and appropriate preparatory work by principals before ARs are appointed.