Becoming an appointed representative is a well-established, viable alternative for firms that need an efficient route to market without obtaining full FCA authorisation. With Brexit looming large on the horizon, appointed representative services could be more crucial than ever before – especially for small to mid-sized firms looking for flexible, affordable contingency plans in the event of a less-than-favourable Brexit deal.
What is the appointed representative solution?
According to Section 19 of the Financial Services and Markets Act 2000, a person cannot carry out regulated activities in the UK unless authorised by the Financial Conduct Authority (FCA) or the Prudential Conduct Authority (PRA). This is known as the general prohibition, but there are a few exemptions that may apply. These include recognised investment exchanges, clearing houses, and individuals falling within certain professions.
Achieving FCA authorisation can however be a costly, lengthy and onerous process, taking up to 12 months to complete. To circumvent this requirement and conduct regulated activities without direct authorisation, firms can instead choose to become an appointed representative of a principal firm that has its own FCA authorisation. Sapia Partners LLP and G10 Capital – part of Lawson Conner (which, in turn, is part of the IQ-EQ group) – are principals with the combined experience of having launched more than 300 regulated entities. Both offer appointed representative solutions that ease much of the compliance burden.
What impact could Brexit have?
One of the biggest Brexit-related issues for the financial services industry is the potential loss of passporting rights. The current system of passporting rights allows EEA firms to trade in any other EEA state without the need for further authorisation. If these passporting rights disappear, the UK will become a third country, dependent on EU equivalence.
In light of the forthcoming General Election on 12 December, the political situation and the outcome of Brexit is looking particularly ambiguous. If and when the UK will leave the EU is up in the air and the likelihood of a deal or the ramifications for the financial services industry is still unknown.
Earlier in the year, when the Brexit deadline was still October, the UK and EU regulators had agreed a deal “in substance” that would allow the process of delegation to continue. While this seemed positive, in the event of a no-deal Brexit it would still leave the UK relying on equivalence, which is not as robust as the previous passporting system. Equivalence can be revoked at any time, especially as it depends on the European Commission’s determination of whether supervisory regimes have the same outcomes. It is also only available in the 15 EU acts that cover third-country provisions, so some types of financial services still have no equivalence regime. Further, the system lacks a uniform standard of assessment and could be described as a slow, one-sided process, where the European Commission determines if a country’s rules and mechanisms are equivalent. Some would argue that the equivalence regime has become very politicised, as demonstrated by the recent decision that ongoing equivalence recognition of the Swiss stock market would be conditional, based upon its progress towards a new framework.
Larger financial services firms and banks had already started mitigating the risks of a no-deal Brexit by moving operations to other EU states when it looked like Brexit would come to pass in October. Recent research from EY suggests that over £1 trillion of assets have already been moved from the UK to the EU 27. Several major banks including HSBC and Barclays have also discussed the possibility of moving more of their operations outside of the UK in the event of a no-deal Brexit. A further survey from New Financial suggests that only a small number of firms have said what they are moving but already the numbers are very large: £800 billion in bank assets is being moved to other EU states including Luxembourg and Dublin, representing around 10% of the UK banking system. For smaller and mid-size firms, however, contingency strategies like this may be prohibitive, and using an appointed representative solution could be more feasible.
Brexit as an opportunity for further regulatory change
To add to the confusion, FCA head Andrew Bailey stated in March that the regulator would look to be able to pursue a “same outcome, lower burden” approach in any post-Brexit deal. This was backed up by the FCA’s 2019/20 business plan, which said that that Brexit would present “an opportunity to rethink how it operates”. What this means now that a General Election has been called is uncertain – there is even the possibility of a new referendum – but there could still be regulatory change looming. There have notably been numerous calls from working groups to prevent some directives being transposed into British law, indicating that changes in regulation are indeed on the horizon, which could cause further complication when launching a fund.
Even without the lack of clarity associated with Brexit, keeping on top of fast-paced regulatory change has been challenging for financial services firms. A raft of new regulations is currently being introduced, including the Senior Managers and Certification Regime (SMCR) for fund managers, which comes into force in December, and the Fifth Anti Money Laundering Directive – putting firms under more compliance pressure than ever. Using an appointed representative solution can negate some of the associated challenges as it includes a robust governance framework that is regularly updated and has the capacity to manage mandatory reporting requirements.
The challenge of direct authorisation
Direct authorisation is often costly and can involve taking on additional staff with specific compliance expertise, and now with an ambiguous Brexit looming it has become increasingly complicated, so the appointed representative route is likely to save money as well as time. Speed to market is vital for regulated businesses but maintaining compliance and staying up-to-date with regulatory requirements is equally important. Becoming an appointed representative can provide a good balance between the two priorities.
For our appointed representatives, for example, we can provide MiFID passport services enabling operation in Europe as a tied agent, which works well if you want to distribute UCITS funds or operate in the primary finance markets across the European Economic Area. This approach negates Brexit risk and provides uninterrupted service across all European jurisdictions – no matter what form Brexit ultimately takes.
About Lawson Conner
Part of the IQ-EQ group, Lawson Conner is an award-winning provider of outsourced regulatory hosting and compliance solutions. Clients benefit from a state-of-the-art technology platform that reduces compliance risks and increases efficiency. Every appointed representative is supported by a leading team of compliance professionals.
Using Lawson Conner’s appointed representative services saves time and money, offers a quick and efficient route to market, cushions against post-Brexit uncertainty and offers unparalleled access to high-quality compliance expertise. To find out how we could support your business launch in just a few weeks, please get in touch:
T: +44 207 305 5810
E: [email protected]