FCA to Question Principal Firms on Appointed Representatives Regime

The FCA has written to principal firms to notify them that they may be contacted to participate in a telephone questionnaire, designed to aid the regulator in evaluating the implementation of new rules relating to the Appointed Representatives Regime.

The FCA has written to principal firms to notify them that they may be contacted to participate in a telephone questionnaire, designed to aid the regulator in evaluating the implementation of new rules relating to the AR (Appointed Representatives) Regime, which came into effect from 8 December 2023.

According to the FCA, the questionnaire will ask how AR oversight obligations are met, including the new requirement for annual reviews and self-assessments, and whether any additional changes have been made since the rules were introduced.

The regulator will contact principal firms between 1 March 2024 and 1 April 2024 and has advised that the call will last around 10-15 minutes. Firms should prepare the relevant information and ensure an appropriate staff member is available to discuss AR oversight and provide feedback on any changes made, or challenges faced, after embedding the new AR rules.

Firms should also check that the phone number they have registered with the FCA is correct and, if not, update or amend it as soon as possible.

The FCA made significant changes to the AR Regime after it identified that failings and increased incidents of ‘harm’, such as mis-selling or fraud, had become increasingly prevalent in arrangements involving principals and ARs compared with firms regulated directly by the FCA.

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, according to the FCA. It also revealed that ARs generate up to 400% more complaints and supervisory cases than directly authorised firms.

Nonetheless, the regulator acknowledged in its policy statement that the AR Regime had been beneficial by encouraging innovation and providing smaller firms with market access.

The changes to the AR regime require principals to meet information and notification requirements in addition to the existing rules. Key changes include:

• Principals are required to apply enhanced oversight to monitor ARs (with principals expected to oversee ARs to a level that they would if they were employed by the firm) and ensure adequate systems and controls are in place to do so.
• Principals must notify the FCA about future appointments of ARs 30 days before their appointment and provide more detailed information regarding AR’s (including intended role, services, previous arrangements with other principal firms, and the financial arrangement between the principle and AR).
• Principals must notify the FCA 10 days before changes are made to any AR’s regulated activities.
• Principals must complete an annual self-assessment document which identifies risks and gaps in their compliance with requirements and sets out how the principal is meeting its AR related responsibilities. The document should be reviewed and signed off by the firm’s governing body annually.
• Principals must annually review information on AR activities and business, including fitness and propriety of senior management, the ARs financial position, and the ability of principals to oversee ARs effectively.
• Principals must annually disclose complaints and revenue for each AR to the FCA. AR details should be confirmed as correct on the FSR as part of this annual attestation.

The information collected as part of the telephone survey will be used to evaluate the efficacy of the new rules, whether they have been embedded as intended, and likely inform further supervisory work on the oversight of AR arrangements.

In keeping with the FCA’s ‘data driven approach’, the questionnaire emphasises the regulator’s focus on data and metrics to monitor the sector and emerging trends, along with the recent survey sent to firms requesting data regarding incidents of non-financial misconduct and use of NDAs.

Principal firms should ensure that they can compile and evaluate evidence of their implementation of the new AR rules ahead of the FCA questionnaire to demonstrate a proactive approach to preventing consumer harm, compliance with the consumer duty, and accountability for financial conduct.

It remains to be seen whether the requirement for a greater oversight of ARs and subsequent increase in charges for principals has had an impact on hosting activities or persuaded more firms entering the market to opt for direct authorisation.