On 3 August 2022, the UK’s Financial Conduct Authority (FCA) published a Policy Statement setting out new rules to improve its Appointed Representatives (AR) regime and enhance the protection of both consumers and markets.
This is the latest in a series of publications, including the FCA Business Plan and Strategy, all of which emphasise enhanced scrutiny on the sector. So there is nothing here that is unexpected.
From a responsible principal firm’s perspective there are two major positives:
First, the benefits of the regime are acknowledged: “increased customer choice; providing principals and ARs with a cost-effective way to comply with regulation; providing market access for smaller firms and supporting innovation as some firms use the model to trial new services and propositions”.
Second, the enhanced rules will encourage weaker players to drop out. The bar is higher and those who cannot meet the standards need to leave, which will benefit the remaining principals who are prepared to invest in the people, systems and processes that are needed.
The rules have been tightened in a number of areas, with firms given four months to prepare. All of the new requirements support the view that the AR regime is not a soft touch; rather, it is designed to provide swift and potentially short-term access to regulated activities while a firm prepares for full authorisation or grows to a sustainable size when it can afford its own compliance infrastructure.
The most important changes are:
- Principals need to collect more data on ARs, meaning they need adequate staff and robust processes. This includes data on the nature of activities, revenues, complaints, and whether the AR was previously associated with a different principal firm. In particular, an annual review of ARs activities, business and senior management is required
- Principals must notify the FCA 30 days before new AR appointments take effect, which is likely to delay the process
- Firms wishing to offer regulatory hosting services must identify themselves to the regulator, which might indicate that there will be further FCA supervision
- Principals need to conduct more monitoring, including an annual assessment of the fitness and propriety of individuals at their ARs. This means the principals’ monitoring teams need to be well resourced and highly skilled. There is an expectation that principals should oversee individuals at ARs to a comparable standard as if they were directly employed by the principal
- The governing body of the principal firm must sign off annually that the firm is complying with all its obligations. This means that the governing body needs to be closer to the detail on individual AR arrangements
- The circumstances under which principals should terminate an AR relationship have been clarified, and any wind-downs resulting from a termination decision must be conducted in an orderly manner.
The new rules take effect on 8 December and, as a responsible principal firm, we at IQ-EQ are busy preparing to be ready for this date. Similarly, all responsible ARs should be challenging their principal firm on whether they can meet these new requirements. Click here for five key questions to ask your principal firm.