Getting an Appointed Representative application approved by the FCA: what is involved?

The AR model can deliver significant benefits if operated correctly, for applicants who are starting out and yet ready to be fully regulated, to Principal firms wanting to branch out into other markets and reach a broader spectrum of customers.

However, over the last few years FCA has expressed concerns over the AR space, stating that, from 2018 to mid-2019, principal firms and their ARs accounted for 60% of the value of claims to the Financial Services Compensation Scheme- a total of £1.1b. It also revealed that ARs generate up to 400% more complaints and supervisory cases than directly authorised firms.

The FCA made significant changes to the AR Regime in December 2022 after identifying failings and that an increase in harm, such as mis-selling or fraud, had become prevalent in arrangements involving principals and ARs compared with firms regulated directly by the FCA.

As a result of these concerns, the FCA implemented new rules for Principal firms around oversight and governance of ARs, introduced a new RegData Return (REP025), and has increased its level of scrutiny on new AR applications.

Nonetheless, firms continue to want to appoint Ars. In its 2023 Q4 Authorisations statistics, the FCA reported that 24,837 notifications in relation to ARs were determined in the 2023 period 2.

This article explores the various stages involved in getting an AR application approved by the FCA, the regulator’s requirements and key considerations for firms looking to navigate the process smoothly and avoid delays.

What do those wanting to get on board with this model need to know?

The FCA’s website will give you a broad outline of the regulator’s requirements, which include Principal firms undertaking sufficient due diligence and checks to ensure a prospective AR is financially stable, and that staff and management are competent. There is, however, no specific guidance on what due diligence and checks a firm needs to complete, just a vague statement that the FCA may request further information if an AR’s business model is ‘more complex’.

Approved Persons must also be appointed; an AR requires at least one Approved Person to operate, and any application(s) for the individual(s) concerned must be submitted at the same time as the application for the AR. If the AR’s main business is insurance distribution, then all its directors will need to apply for approved person status. Delays are likely as Approved Persons applications require information from third parties, such as DBS checks and regulatory references.

All of this must be submitted with a 30-day pre-notification period, meaning an application must be submitted at least 30 days prior to the date a firm wants the AR to go live. However, the FCA notes that, in many cases, it will take longer than 30 days to complete an AR appointment; furthermore, as the FCA have set no targets regarding these applications, other than its statutory deadlines, it is almost impossible to define a timescale.

Why does the process take so long?

After the firm has completed its application and provided all information requested during the application, often, the FCA will still consider an application incomplete and return to the firm with a swathe of further questions- some of which the firm may feel that they have already answered, and some of which the firm may feel could have been asked on the application form.

What questions are the FCA asking, or likely to ask?

The majority of questions asked concern the AR’s business plan, the Principal firm’s oversight and monitoring of their prospective AR, conflicts of interest management between the firms, and the suitability of the Principal’s PI insurance.

These additional questions are designed to prevent the harms observed by the FCA within the AR space. Ultimately, the FCA are aiming to ensure that Principal firms have a better understanding and oversight of their ARs- which is also to the benefit of the firm, as the Principal firm could be held responsible if the AR fails to comply with relevant FCA rules. Remember, the Principal firm, in effect, becomes the AR’s regulator.

If your prospective AR is an overseas firm, you can expect significantly more questions and a much higher level of scrutiny from the regulator, mainly due to its concerns about the Principal firm's ability to conduct suitable oversight and monitoring on a firm that isn’t located in the same country.

What must firms consider before completing an application to appoint a new AR?

Complete, thorough due diligence.

The FCA expects firms to have considered the prospective AR’s financial situation and stability, the suitability of its staff to undertake regulated activity, the fitness and propriety of its senior management, and whether the proposed operating model aligns with the Principal firm’s business plan. Firms must be able to present evidence these checked have been undertaken, what the findings were, as well as justification for the assessment outcome.

Consideration of firm resources.

Firms must evidence that they have sufficient resources to carry out a suitable risk-based monitoring program on the AR, additional financial resources to cover capital adequacy requirements, and PI Insurance to cover the AR’s activity.

As at least one Approved Person application must be submitted, firms should consider requesting DBS checks and regulatory references for chosen individuals early to avoid having to wait for this information before an application can be submitted. Remember, the FCA will not accept a DBS check older than 3 months.