Regulators taking closer look at Appointed Representative regime

The Appointed Representative (AR) regime provides firms with a simple, efficient alternative to direct authorisation from the Financial Conduct Authority (FCA) to conduct regulated activities in the UK. Under this arrangement, an FCA-authorised firm acts as principal and assumes responsibility for the conduct of an agent, designated as the AR.

The principal firm is responsible for ensuring their ARs comply with FCA rules and is held accountable for any violations. Firms can therefore launch in the UK without navigating the lengthy process of acquiring direct authorisation. And because the responsibility for regulatory compliance lies with the principal firm, ARs are able to focus on their core business.

However, while the AR regime has numerous benefits, particularly for new funds and for fostering innovation in the financial services sector as a whole, the FCA has also identified significant challenges:

• Weaknesses in governance, due diligence, control and oversight: Principals aren’t always effective in overseeing the activities of their ARs, which has led to breaches. Lack of effective risk frameworks has often meant that principals were not adequately assessing the risks their ARs’ activities posed to their firms and investors
• Staff performing similar roles in the principal firm and its AR are subject to different rules: Most authorised firms must comply with the Senior Managers and Certification Regime (SMCR), but staff of ARs do not. (Instead, they must comply with the Approved Persons Regime.) This discrepancy has led to some confusion
• Potential risk of consumer harm: The FCA has found that principal firms who use ARs may be (in general) responsible for more complaints than non-principals, which could indicate a higher risk of consumer harm from principal firms.

In December 2021, the FCA published a consultation paper outlining proposed changes to the Appointed Representative regime. These proposed changes are intended to address the above concerns by increasing effective oversight of ARs by their principals. The stated goal is “to ensure that principals are properly overseeing their appointed representatives, ensuring they are competent, financially stable, and delivering fair outcomes for consumers.”

The two primary areas of suggested change in the FCA’s proposal are:

• Additional information on ARs and notification requirements for principal firms: The objective is to better identify potential risks and assess whether a principal firm is qualified to effectively supervise the activities of its ARs
• Clarifying and strengthening responsibilities of principal firms: The FCA would like to provide additional guidance for principal firms on the nature of their responsibilities and expected actions when overseeing ARs.

For more insight into the future of regulatory hosting in the UK, click here.

Regulators are taking a closer look—and so should ARs

We believe the move toward increased regulation of principal firms is a positive step—and we think ARs should be pleased, too. More regulatory scrutiny will bolster their ability to prove to investors that they have appropriate oversight and are conducting adequately scrutinised activities. Investors don’t want to be misled or invest in a firm with rampant misconduct, so increased oversight benefits everyone.

Under the amended regulation, ARs will likely be required to provide their principal firms with more data, such as their revenue split between regulated and non-regulated activities. And this data sharing should go both ways; ARs should be prepared to ask probing questions of their principal firm before entering into any arrangement.

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.