Exploring the FCA review report on Principal firms’ AR oversight: Part Two

The FCA recently published a review report noting that, whilst Principals’ oversight of ARs has improved, some firms are taking a “tick-box approach” to compliance with the rules and relying on basic information, such as website checks or self-declarations from their ARs, to demonstrate effective oversight. 

The review was conducted by the regulator to assess Principal firms’ oversight of ARs and compliance with FCA rules following the implementation of the enhanced AR regime in December 2022. The new rules require firms to undertake annual reviews of each AR they appoint and annually self-assess their ability to oversee their AR. The analysis involved a telephone survey with 251 principals and in-depth assessments of documentation from 23 firms.  

This article is the second of a two-part series. Last weeks’ article explored key findings from the FCA’ review in relation to firms’ self-assessments, annual reviews and their monitoring and oversight of ARs; this weeks’ article will explore the reviews findings in relation to firms’ approach to AR onboarding, termination and wind-down.  

Report Findings 

Approach to onboarding ARs 

Most firms that participated in the FCA telephone questionnaire and in-depth assessment said they had not taken a new or different approach to onboarding ARs or IARs since our rules changed; only 10% said they had taken a new approach and now included more detailed checks of an AR’s financial stability, business model and staff competency in the onboarding process. 

The review found several areas for improvement across firms including; a sole reliance in some firms on automated checks (without human judgement or oversight) when undertaking background searches, failing to understand required contract terms for AR agreements (set out in SUP 12.5 and legislation), and a lack of consideration of the impact appointing an AR would have on the principal’s financial and non-financial resources. 

The FCA recommended the following examples of good practice 

• Clearly documented procedures for AR onboarding that are maintained and up to date. 
• Providing training on an initial and ongoing basis to ARs about the regulated activities they undertake, financial products they sell and regulatory expectations relating to their business.
• Increased due diligence when onboarding ARs (e.g. reviewing financial accounts and linked individuals on Companies House, anti-money-laundering procedures and financial due diligence checks). Considering what AR’s unregulated activities will be and evaluating the risk of consumer harm. 

Termination, offboarding and orderly wind-down 

Only 10% firms that participated in the telephone questionnaire and in-depth assessment reported having adopted a new approach to terminating ARs or IARs since the rules had changed.  

The FCA called for improvement in areas such as; firms not checking an AR’s website after termination to ensure it no longer stated it was an AR or could undertake regulated activities on behalf of the firm, and firms who did not have a clear mechanism for considering whether it would be appropriate to terminate AR arrangements. 

The FCA recommended the following as good practice:  

• Terminating AR relationships where the AR has not conducted regulated activities for some time and does not have a valid reason for continuing to use the principal’s permissions.
• Undertaking regular reviews of ARs’ activities to avoid consumer harm from the ‘halo effect’ of being listed on the Financial Services Register purely to promote risky unregulated activities. 
• Monitoring AR size and any changes to business models to inform assessments of whether the principal can continue to effectively manage and oversee their ARs, or whether remedial steps or termination may be required. 
• Having a clear offboarding policy reflecting the principal’s obligation to terminate contracts with ARs where issues cannot be rectified.

UKGI Group urges firms to assess their AR oversight arrangements against the areas for improvement and examples of good practice cited by the FCA in its review, and to act to remedy any gaps in their compliance with the regulator’s requirements and expectations.  

Additional support 

Get in touch with UKGI Compliance for further advice and guidance; our consultants can assist in reviewing AR oversight and identify how your business can develop and demonstrate effective self-assessments, annual reviews, monitoring and onboarding and termination processes.  

Learn more 

Our e-learning platform, the Development Zone, contains courses to help teams to assess and build knowledge on key areas- all whilst fulfilling CPD requirements. Why not check out our course ‘Appointed Representatives and Introducers’ following the FCA’s review to recap on key points and ensure your team has a strong knowledge of this topic?  

If you are not a Development Zone user, get in touch with the team at devzone@ukgigroup.com to discuss our services and access a 14-day free trial to view the system and it's features for yourself- no commitment, no cost.