Legal development

Appointed Representative Regime a serious shift in obligations and expectations

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    The FCA has published new rules that will increase the compliance obligations for principal firms (principals) in order to ensure what the FCA considers adequate consideration of their appointed representatives (ARs).

    The FCA's requirements fall into two categories. The first is an obligation to provide additional and ongoing data to the FCA by principals. The second is substantially increasing the obligations on principals prior to, but also during, the ongoing appointment of any AR.

    In addition to these new rules, we expect to see ongoing FCA focus on the relationship between ARs and their principals. Principals will see more FCA proactive and reactive surveillance, no doubt assisted by the wealth of additional data. Anecdotally, new ARs are taking longer (due to the requirement to complete Form As) and a process that was more like a registration previously is closer to a light touch application.

    Although the AR regime imposes obligations on the principal, these additional obligations on ARs will be imposed by the principal to obtain necessary information and comfort on their conduct.
    This is not the end of the road for changes to the AR regime. Further changes are expected as the FCA is working with Treasury on potential legislative changes to the AR regime.

    Practical next steps - summary

    • Principals should prepare for a section 165 data request from the FCA (this is the FCA's power to require information from firms) – principals will have 60 days to submit data. This will be similar to the October 2021 exercise and will include information on the reason for appointment, the business model and revenue streams.
    • There is a short implementation period until 8 December 2022 and so principals need to take immediate steps to address new obligations. There are limited transitional provisions.
    • Principals should ensure that their contractual arrangements with the ARs are appropriately documented.
    • Principals and ARs may wish to consider whether the practical benefits of the AR regime are now limited and whether their ARs should pursue full authorisation.

    Changes

    Additional data

    The FCA will be requesting data later this year via its power under s165 FSMA for information from all principals. Principals will have 60 days to provide information. This will require principals to provide information on the business of the ARs.

    The FCA will now require principals notify it at least 30 calendar days before the appointment of an AR takes effect. In practice, this may not impact firms too much given the delays that are in place at present but firms will need to build this into timetables. The immediateness of appointment has historically been a benefit over a full authorisation.

    Periodic data will need to be provided, for instance on the complaints data and revenue information of the ARs, on an annual basis by principals to the FCA.

    Enhancing and clarifying expectations of principals

    The FCA is introducing new obligations of principals. The principal must:

    • ensure arrangements with ARs to provide functions or tasks of the AR do not present a conflict of interests;
    • where the principal is delegating a task or function to an AR, put appropriate safeguards in place. The FCA expects delegated tasks or functions would normally be identifiable as part of the principal’s contractual agreement
    • monitor activities outside the scope of the appointment; and
    • assess senior management at ARs for competence and capability.

    Overseeing ARs effectively

    Whilst principals have always been required to ensure that they have adequate controls, the FCA has strengthened this and provides practical guidance. Principals should also re-assess whether their controls and resources continue to remain adequate. The growth of ARs will need to be monitored in this context to ensure these remain appropriate as the relationship develops. ARs should be overseen to the same standard as employees of the principal.

    An annual review assessing activities will be required and this will need to be reviewed signed off by the governing body of the principal.

    Termination and winding down

    The FCA is introducing new rules for the termination of contracts. These may be triggered where the growth of an AR means it cannot be monitored. Termination must be done in an orderly fashion.

    Further changes expected

    The FCA has taken significant steps to amend the aspects of the AR regime. However, there are additional changes that the FCA no doubt wants that would require amendment of primary legislation. The FCA is liaising with the Treasury on the regime and it is likely that the use of the AR regime will be curtailed.

    What should principals be doing?

    Principals should ensure that they are supervising their ARs in accordance with new rules. This may require expanding internal policies and procedures. In cases where the arrangements are intragroup ensuring that conflicts are dealt with is necessary.

    In many cases, principals will be in compliance with many of these rules already and will need to simply take steps to ensure documentation is appropriate.

    We would anticipate the FCA asking for annual assessments of ARs, ongoing management and to see that contracts meet the new rules in 2023.

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