FCA shine a light on appointed representatives
What is the AR Regime?
The Appointed Representative (AR) regime enables small firms and individuals to engage in regulated activities without having to be authorised themselves. The small firm or individual becomes an AR, and operates under an authorised firm, known as 'the principal'. The principal is responsible for the regulated activities which the AR carries out. There are currently around 2,900 principals and 35,000 ARs.
The regime isn’t new; it’s been in place since 1986, but over the last few years the FCA’s scrutiny of it has increased significantly. The FCA has stated that while the regime has benefits, its regulatory case data has raised concerns about the level of harm created by ARs. As a result, in December last year it introduced new rules and guidance to clarify and strengthen its expectations on principals’ oversight of ARs. It has also established a dedicated AR Department. We’ve seen a big uptick in skilled person work focused on AR oversight as well.
Last week the FCA issued some data analysis from its 2021 and 2022 data requests sent to principal firms and authorisation information collected from firms. It also outlined how it is improving the AR regime and what it expects from principals.
One thing is clear; the FCA’s level of scrutiny of principals and ARs is not going to reduce any time soon.
Advice for ARs
The FCA is committed to improving the AR regime. As a result, principals must ensure that any ARs they onboard do not present a significant risk to their business and are unlikely to result in increased FCA scrutiny or enforcement action.
The FCA has stated that its supervisory engagement has resulted in principals terminating their relationships with over 1,300 ARs. Anecdotal evidence also suggests that this increased scrutiny has resulted in many more ARs finding it extremely difficult to find a principal firm that is willing to onboard them due to the risks they present.
If you are a firm wishing to become an AR, challenge yourself and ask yourself the following before speaking to potential principals:
Business Plans: do you have a robust business plan? Would this stand up to the scrutiny of the principal and the FCA?
Fitness & Propriety: Can you demonstrate the fitness and propriety of your senior management? Is there anything that might make either the FCA or the principal deem you not fit and proper? The principal and the FCA will find anything you don’t tell them, so it’s essential that you discuss any potential issues upfront;
Solvency: Can you demonstrate to the principal that your business is solvent? If you can’t, they won’t be able to take you on as an AR.
Systems & Controls: are your systems and controls robust? How can you demonstrate this to the principal?
We are aware of principal firms that are requiring more complex ARs or those that they deem to present a higher risk to undergo an assessment by a third party before they are willing to onboard them. Would you pass this assessment, and would a principal firm be willing to onboard you?
How we can help ARs
Whether you’re compelled to get a review, or you want to be proactive, we can deliver targeted, proportionate and cost efficient independent reviews which you can use to demonstrate that you’re in control.
Advice for Principal Firms
The FCA has said that since the introduction of its AR Department, twelve principal firms have applied for the imposition of requirements (VREQs) to restrict how they carry out their business. There have also been many more interventions, including Skilled Person reviews, requiring principals to implement stronger systems and controls and stopping the onboarding of any new ARs.
The FCA’s new rules mean that as a principal firm you must have adequate controls over your ARs’ activities. You must also have adequate resources to monitor and enforce ARs’ compliance with the relevant requirements that apply to their regulated activities.
Ask yourself the following:
Oversight of ARs: Since the FCA’s new rules came into force, have you adequately enhanced your oversight of ARs? Are your systems, controls, and resources sufficient to effectively conduct your role as principal? How have you tested this? What evidence do you have?
Annual self-assessment: How are you identifying risks and gaps and how are you addressing them? Is this clearly documented? Does your self-assessment clearly demonstrate how you are complying with your obligations as a principal? How do you know that your ARs are not causing harm?
Annual review of AR’s activities and business: Are you effectively reviewing information on your ARs’ activities and business? How are your assessing the fitness and propriety of senior management, the ARs’ financial position and the adequacy of your controls and resources to effectively oversee your ARs? How clear is this and would it stand up to the scrutiny of a third party?
Complaints data: Does your complaints data indicate that one or more of your ARs is causing harm? If so, what are you doing to address this?
How we can help principals
We can advise on, or assess, your framework in order to help you avoid regulatory scrutiny. Whether you’ve been compelled to find a skilled person or you just want that bit of reassurance we’ll work with you to agree a proportionate, expert response.
If you’d like to chat, please get in touch.
Helen
