Changes to the Appointed Representative Regime
What is the Appointed Representative Regime?
The Appointed Representative (AR) regime is a regulatory framework that allows individuals or firms to provide financial services to customers on behalf of a regulated firm. It allows self-employed representatives to engage in regulated activities, without having to be authorised. Introduced in 1986 following the Financial Services Act, there are now approximately 40,000 ARs in the UK, operating through 3,600 principals. These firms work across a wide range of financial services markets, including retail lending, retail investments, general insurance and protection.
Why the change was needed
In 2021, the FCA announced that it considered that the AR regime posed a considerable risk to the fair treatment of customers and felt that a higher level of regulatory control was needed. When harm occurred, the FCA’s view was that it was largely because principals had not conducted adequate due diligence before appointing an AR, with poor ongoing control and oversight. As detailed in the FCA’s consultation paper CP21/34, customer complaints per £1m of revenue of regulated activities were consistently higher for AR principal firms than non-principals. Principals were involved in 50%-400% more cases being referred to the FCA’s supervisory teams than non-principals. These concerns led to the consultation process that has recently concluded.
The Key Areas for Change
The FCA’s consultation process proposed two main areas of change for the AR regime. Firstly, the FCA will require principals to provide additional information and notifications regarding their ARs. Secondly, the FCA proposed to clarify and strengthen the responsibilities and expectations of principals. Additionally, the FCA is looking to simplify the structure of the rules and guidance relating to ARs. A lot of this change will be about the provision of data to the FCA as it transitions to a data-led regulator.
Who will the changes affect?
The changes will affect all firms that currently have an AR or intend to have an AR in the future, as well as ARs themselves. They will not apply to firms in the Temporary Permissions Regime or firms that are winding down their UK business as a result of the post-Brexit loss of passporting.
When the change took effect
The changes took effect on 8th December 2022, with the FCA sending principal firms a Section 165 request asking for information about their ARs. Firms had until 28th February 2023 to respond.
What the AR regime changes will mean
The new regime will impose new review requirements, including an assessment, at least once a year. These will assess each ARs suitability, fitness, financial position and the adequacy of the principal’s controls and resources. Following feedback from firms, the FCA confirmed that this can be achieved by principals integrating the assessments into existing internal reporting processes.
In addition, principals must complete a self-assessment to monitor whether they are meeting their own responsibilities in relation to each of their ARs in the form of a single document, designed to identify any risks and gaps in compliance with the firm’s obligations as a principal. The assessment must be reviewed and signed off by the principal governing body at least every 12 months, but only submitted to the FCA if requested.
What next for the AR regime
The FCA believes that having more information on ARs and principals will allow it to better assess principals’ arrangements to monitor and control their ARs activities, and better identify any risks. The changes imposed by the new rules are significant, due to the high level of concern the FCA felt about the way in which the regime has been operating. In addition, the FCA is working with the Treasury to consider areas of potential legislative change, including the scope of activities ARs are permitted to conduct and coverage of ARs by the Financial Ombudsman Service. With this in mind, it is highly possible that there could be further regulatory or even legislative changes in the changes to the Appointed Representatives regime in the future.
Helping you to understand your options
Panima understands the challenges and needs faced by clients in today’s financial services environment. For clients wishing to provide Investment Advisory/Arranging or Marketing activities under their own name without direct authorisation, Panima can act as Principle ensuring compliance with all FCA regulations. We can help firms worried about the cost and complexity of bringing together such detailed levels of information about individual ARs, using our experiences over the last decade to ensure you can focus on making your business a success and allowing you to concentrate on what you do best.
To find out how we can help with regulatory hosting or our hedge fund platform, please contact us by email andrew.myles@panima-capital.com or on 02034733794.
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