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 oversight of 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.
Principals will be expected to dedicate more resource and time to the appointment process, undoubtedly bringing the cost-benefit analysis of AR relationships for principals into sharp relief.
What will principals need to do on an ongoing basis?
The current rules focus on the prescribed requirements applying to contracts between principals and ARs. Detail on the contractual terms is set out in the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001 (SI 2001/1217). Under the new regime, once ARs are appointed, principals will need to:
