AR they fit for purpose, Part 2: the FCA publishes its improvements to the Appointed Representative regime

Last month, we reported on the Financial Conduct Authority (“the FCA”)’s recent activity in the field of Appointed Representatives (“ARs”).  In particular, we discussed the FCA’s growing concerns about the AR regime, and the action that it has recently taken to consult on changes to that regime.  This action is in keeping with the FCA’s focus on the AR regime set out in its Business Plan and Strategy for 2022-2025, and shows no sign of abating.

This month, the FCA has published its Policy Statement on “Improvements to the Appointed Representative Regime” (PS22/11).  This discusses the feedback that the FCA received on its recent consultation in this area (CP21/34, discussed in our last article); its responses to that feedback; and its final rules including changes to the rules and guidance in the relevant part of the FCA’s handbook, SUP 12.  The FCA is also considering further areas of change, in consultation with the Treasury and its work on the AR regime, and expects to publish a further document next year (as does the Treasury).

The FCA reported that most responses supported its proposals, agreeing that the AR regime needs changing in order to be fit for purpose.  The FCA is proceeding with its proposals that gained wide-ranging support, giving those affected – primarily ARs (including Introducer ARs) and their principals – around four months to prepare for the implementation of the new regime, which will come into force on 8 December 2022.

In doing so, the FCA has brought in changes affecting both ARs and their principals, albeit with a clear emphasis on principals’ responsibilities.  For its part, the FCA expects to be able to better challenge firms with ARs, and firms looking to appoint ARs.  The FCA has also noted that its changes to the AR regime intersect closely with its new Consumer Duty to firms, coming into force next July.

As regards ARs themselves, the FCA will primarily collect additional information on them.  Principals will have their responsibilities and expectations clarified and strengthened, and their reporting requirements will be strengthened too.  Consequently, the FCA expects principals to have better oversight of their ARs and to take more effective responsibility for them, including addressing problems that cause harm to consumers, or have the potential to do so.

The key proposals that the FCA is implementing are:

• Information and notification requirements:
  • Principals must notify the FCA of future AR appointments 30 calendar days before the appointment takes effect;
  • The FCA will raise data requests of principals about their ARs using its powers under section 165 Financial Services and Markets Act 2000 (“FSMA”), giving principals 60 days to submit the data;
  • Principals must provide more information on the business of their ARs, including the nature of the regulated activity that the ARs will conduct and the anticipated revenue of the ARs (by revenue band);
  • Principals must provide complaints data and revenue information for their ARs on an annual basis, between 30 and 60 days after their accounting reference date; and
  • Principals must notify the FCA in advance if they intend to provide regulatory hosting services.
• Responsibilities of principals and the FCA’s expectations:
  • Principals must apply enhanced oversight of their ARs, including ensuing the adequacy of systems and controls, and the sufficiency of resources and monitoring of AR growth;
  • Principals must take more effective responsibility for their ARs, including by monitoring and assessing the risk of harm to consumers and market integrity, and overseeing ARs to a comparable standard as if they were employees;
  • Principals must have clarity on the circumstances where they should terminate an AR relationship and assist ARs with an orderly wind down; and
  • Principals must annually review information on ARs’ activities, business and senior management, including a single self-assessment document by the principal about how they are meeting the FCA’s requirements in relation to all of their ARs. The first such reviews will accordingly need to be completed by 8 December 2023 at the latest.

As can be seen, the FCA remains focused on seeking to improve the operation of the AR regime.  In doing so, the FCA is primarily addressing the roles and responsibilities of principals because they are directly subject to the FCA’s powers.  Generally speaking, principals are also often larger than ARs and so potentially more able to bear the FCA’s increased requirements (albeit the costs of doing so may well then be passed on to ARs in one form or another).  Interestingly, a number of the respondents to the FCA’s consultation reported that they already engaged in practices similar to those now required by the FCA.

It will be interesting to see how the FCA’s changes to the AR regime will affect its operation, and its attractiveness to principals.  As noted above, those principals who are already dealing with their ARs well may only need to make relatively modest changes to their operations; other principals may find the administrative burden of having ARs more onerous and so may consider whether they still wish to be part of the regime.  A particularly challenging change is the FCA’s requirement that principals supervise ARs to a comparable standard as though they were employees.  Not only is this potentially problematic for the legal relationship between ARs and principals (which is that of agent and principal, not employee and employer), but it is unclear how practically principals can meet this requirement where their ARs operate from different premises, potentially some distance away.

Unfortunately, a number of the key problems that we have seen with ARs turn on systemic mis-selling over a short period of time and fraud, which by their nature often do not become apparent to the principal until longer after they have occurred.  It is unclear whether the FCA’s changes are sufficiently proactive to address these issues adequately, so principals may wish to consider any further means by which they can keep tabs on ARs.  Insurers of IFAs who operate ARs will also wish to consider those IFAs’ practices, systems and controls, in order to better understand the risks that they face.  In the longer term, fewer IFAs may use the AR regime, which may reduce their insurers’ exposure to risk.

In the meantime, the development of the AR regime remains a hot topic for the FCA and one that will no doubt remain under close scrutiny.  As we saw, further proposals for change are expected from the FCA next year, and also from the Treasury.  The latter may prove even more dramatic than the FCA’s work, as among other things the Treasury is considering changing the whole scope of the AR regime in section 39 FSMA, increasing the FCA’s powers to prevent abuse of the AR regime, considering whether more direct regulatory requirements should be placed on ARs, and extending the ability of the Financial Ombudsman Service (“the FOS”) to consider complaints about ARs.  All of this means that change is very much here to stay, as it is in so many areas of financial services.