Improving the AR regime: New FCA UK economic growth objective

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In August, the UK’s Financial Conduct Authority (FCA) set out new rules to improve the Appointed Representatives (AR) regime, which will take effect on 8 December 2022. In tandem, a new objective has been proposed for the FCA to support UK economic growth. Here we will examine how improving the AR regime for regulatory hosts can help the FCA achieve this new goal.

The Financial Services and Markets Bill – introduced to UK Parliament on 20 July 2022 and likely to become law in early 2023 – will give the FCA a new objective to encourage UK economic growth. At the Future of UK Financial Services Regulation Summit last month, FCA executive director Sarah Pritchard stated: “we are clear that we want to support long-term competitiveness and growth of the UK economy, and know we can do so by being an effective regulator.”

Regulatory incubators

Pritchard’s speech also highlighted that the FCA has helped more than 160 growing businesses to test their offering using its Regulatory Sandbox (launched in 2016), with over 90% becoming authorised. This initiative sits alongside the FCA’s new and innovative Early and High Growth Oversight approach, which aims to support 300 newly authorised businesses by spring 2023. As such, the UK remains the most attractive destination for FinTech in Europe and second only to the United States globally.

The regulatory hosting sector (an important sub-set of the AR sphere) has many similarities to the FCA Regulatory Sandbox, but focuses its support on asset management rather than FinTech entrepreneurs. Indeed, the sector includes around 340 regulatory hosts supporting over 1,000 ARs that are mainly entrepreneurial start-up financial services businesses, with many focused on the management of alternative investment funds (AIFs) including hedge, private equity, real estate and increasingly ESG funds.  

The outcome of the support provided by the sector is the broadly the same: helping the UK remain the most attractive destination for asset management start-ups in Europe and the second-most attractive destination globally.

Giving start-ups the best regulatory start

The move to improve the AR regime dates back to early 2019, when the FCA issued a “Dear CEO” letter scolding regulatory hosting firms for “significant shortcomings in the control and oversight of ARs.” While the FCA raised legitimate criticisms in 2019, the landscape looks much improved today. Some of the leading firms have invested heavily in expert people and technology to enhance governance, risk management, onboarding due diligence and ongoing monitoring in anticipation of new stricter rules coming into force.

As a result, the best regulatory hosts now provide institutional-quality risk and compliance infrastructure to start-up businesses. When an entrepreneur chooses the right hosting firm, their start-up businesses are brought to market with stronger oversight by a host than if they had sought direct FCA authorisation at inception.

White collar levelling up

The strengthening of the regulatory hosting sector directly serves to boost UK-wide economic growth with its support for entrepreneurs starting up and growing regulated financial services businesses across the UK. TheCityUK, the industry body representing UK-based financial and related professional services, estimates that the financial services industry “contributes over 12% of the UK’s total economic output, is the largest taxpayer and employs over 2.2 million people across the country – two thirds of whom are based outside London.”  

What’s more, the regulatory hosts themselves are part of this UK-wide growth. Using IQ-EQ as an example: in addition to our flagship London office, we have rapidly expanding offices in Belfast and Newcastle, creating professional accounting and compliance roles in these cities to support the newly launched funds and growing asset management businesses we serve.

IQ-EQ is the leading provider of regulatory hosting solutions and AR services in the UK. Find out more and get in touch.

This insight was originally published by Reuters Regulatory Intelligence.
Click here for a copy of Andrew's article as seen on Reuters.