**Updated 5 September 2022**
The Appointed Representative (AR) regime provides companies with a simple, efficient alternative to direct authorisation from the Financial Conduct Authority (FCA) to conduct regulated activities in the UK. Under this arrangement, such businesses become ARs of an FCA-authorised firm, which acts as ‘principal’ and assumes accountability for their conduct.
Principal firms need to conduct a detailed risk assessment of every incoming AR during onboarding. However, responsible organisations should also complete due diligence of their own when selecting a principal firm. Principal firms are experiencing greater regulatory scrutiny from the FCA, including new stricter rules that take effect from 8 December 2022, so it behoves every AR to ask the right questions and ensure their principal firm isn’t cutting any corners.
To that end, here are the five key questions every AR should ask their principal firm:
1. Have you had any regulatory intervention?
Firms are required to disclose this information, and the answer can reveal a lot. An instance of regulatory intervention shouldn’t necessarily disqualify a firm from acting as a principal, but it’s good to gather details around the nature of any violation and the steps taken afterwards to correct the issue. Firms that have formed positive working relationships with the FCA are more likely to be keeping abreast of the latest requirements and paying closer attention to their ARs’ behaviour as a result.
2. How many ARs have you offboarded in the last 12 months?
Look for a low number. High turnover should ring at least a few warning bells.
3. How many different business models do you serve?
It has always been important for principal firms to understand the business models of their ARs, and increased oversight makes it doubly so. A principal can’t appropriately oversee an AR whose business activities involve cryptocurrency, for example, without understanding that asset class and its associated complexities. A responsible principal firm should limit their activity to those business models that they thoroughly understand.
4. What about conflicts of interest?
You should ask your principal firm about managing conflicts of interest. Responsible firms should actively identify conflicts and manage them, so keep an eye and an ear out for proactive searching in this area. We also recommend reviewing the FCA register to check if the CEO ("SMF 1") and the Compliance Oversight ("SMF 16") are the same individual as there may be an internal conflict between profitability objectives and meeting FCA’s regulatory standards.
5. How much investment has there been in expert staff and technology in recent years?
The FCA issued a letter to the CEOs of regulatory hosting firms in May 2019 criticising the sector for inadequate governance and systems and controls. Therefore, ask about levels of expert staff hires and investment in best-in-class technology. For example, current levels of elevated sanctions risk require a dedicated MLRO ("SMF 17") and investment in technology that allows daily screening of sanctions lists so that new additions can be identified and remediated promptly.
IQ-EQ has years of experience offering Appointed Representative services and regulatory hosting. Click here to schedule an introductory call and learn more about how we can support your firm.