According to
HM Treasury, within the UK financial services sector, there are around 40,000 Appointed Representative (AR) firms (including introducer ARs) operating under around 3,600 principal firms.
An AR is a firm or person who carries out regulated activity under the responsibility of an authorised financial services firm. The authorised firm, which appoints the representative is known as the ‘principal’. In appointing an AR, the principal take responsibility for the regulated activities being carried out by the AR. The regulatory framework for ARs puts responsibility on the principal to ensure that its appointed ARs are carrying out its regulated activities with a sufficient level of competence and are meeting its regulatory requirements. The Financial Services and Markets Act (2000) (FSMA) provides the Financial Conduct Authority (FCA) with broad rule-making powers, enabling it to impose binding regulatory requirements on authorised persons, including principal firms.
Since the AR regime was first introduced in 1986 (for investment services), it has evolved and been applied and adapted to a wider range of financial services. In its current form, the AR regime is intended to provide a proportionate regulatory approach, which ensures that principal firms maintain effective systems and controls for the oversight of the regulatory activities being undertaken by their ARs. One of the main aims of this level of oversight required by a principal firm, is to ensure that consumers of financial services provided through ARs are not disadvantaged or exposed to additional risks relative to consumers who deal with directly authorised firms.
The FCA has been working closely with HM Treasury to gather information on how market participants use the AR regime and how effectively it works in practice and reviewing challenges to the regime’s safe operation. According to data held by the FCA, on average, principals cause 50% to 400% more supervisory cases than non-principal firms, indicating that there are more issues arising from principals and their ARs rather than directly authorised firms. Some of the risks the FCA found in their data gathering with HM Treasury, included mis-selling and fraud. Due to this, the FCA have implemented changes to the AR regime to enhance consumer protection and to help protect markets.
What is changing
The FCA opened their initial consultation on proposed changes on 3rd December 2021, with the consultation closing on 3rd March 2022. The FCA’s final rules were released in their policy statement (
PS22/11) on 3rd August 2022.
Within the final rules, the FCA are requiring principal firms to provide more information on their ARs and aim to clarify and strengthen the responsibilities and expectations of principals.
These changes will take effect from 8th December 2022. As part of its enhanced reporting requirements, the FCA will be sending out a Section 165 request to all principal firms about their current ARs. Principal firms should expect to receive this letter between 8th and 10th December 2022.
The FCA have given firms until 28th February 2023 to respond to the S165 request.
Key areas of change
Timing
For new AR appointments, principal firms will have to notify the FCA 30 calendar days before the appointment takes effect.
Principal firms will receive a Section 165 request on all existing AR appointments, which will need to be responded to by 28th February 2023.
Regulated and non-regulated activities
Although the FCA are not taking forward the proposal to request principals to provide details of the ARs non-financial non-regulated activities, the FCA are expecting principal firms to have an understanding of the breadth of activities carried out by their ARs, which includes non-regulated activity, in particular if these are financial, where the AR is large in comparison to the principal firm, or where there is increased risk of the AR giving the misleading impression that a non-regulated financial product/activity is regulated. Therefore, although principal firms will not be expected to provide details of an ARs non-financial non-regulated activity, they will be required to provide information on what non-regulated financial activities each AR carries out.
Revenue
The FCA, although not proceeding with its suggested requirement for principal firms to provide it with, on appointment, an estimate of the proportion of the revenue which the AR expects to generate within the first year, it is carrying on with its proposal to request separate estimates of revenue for each of the below categories.
Principal firms should be aware the FCA expects firms to rely of information available when providing these estimates for an ARs revenue over the first year.
Principal firms will be expected to submit data for regulated and non-regulated financial activities to the nearest £5,000 and select the nearest revenue band for non-financial non regulated activities.
Annual review and self-assessment
The FCA has determined that principal firms can satisfy the annual review requirements by integrating them into their existing internal reporting processes (provided these processes meet the FCA standards). Annual reviews can be conducted by responsible individuals below the level of governing body but must have a suitable degree of knowledge and authority and any issues identified with an AR should be escalated to the governing body. The principal firm’s self-assessment is a single document which must be signed off by the governing body every 12 months at a minimum and should focus on how the principal firm is meeting its responsibilities to its ARs. The FCA has also included the expectation for principal firms to monitor AR growth and to ensure there is a sufficient termination clause within contracts allowing for termination where the AR has become too big for the principal to have adequate oversight.
Complaints
Principal firms will be required to submit complaints data annually for each AR in relation to all regulated activity carried out by the AR. The FCA have also expanded AR oversight to include ‘triggers’ where higher levels of oversight should be carried out, such as: