What to look out for in the FCA’s improved representatives regime

The UK Financial Conduct Authority (FCA) has set out new rules in relation to its appointed representatives (AR) regime. The changes will take effect on December 8, 2022, following a four-month implementation period, and will affect all firms that currently have an AR or intend to have an AR in the future – and ARs themselves. 

After Greensill

The AR regime is a longstanding feature of the UK financial services landscape and allows a person (the AR) to carry out certain regulated activities without being authorised by the FCA themselves. As the principal firm must be authorised by the FCA, the AR is able to operate under the cover of the principal’s licence, though the principal remains ultimately responsible for the regulated activities performed by the AR.

Following the failure of Greensill Capital, the UK supply chain finance group that made use of the AR model, the FCA was asked to consider reforms to the AR regime, with the aim of limiting its scope and reducing opportunities for misuse.

The new rules follow the FCA’s consultation paper, ‘Improving the Appointed Representatives regime’, published in December 2021, alongside HM Treasury’s call for evidence. The consultation paper set out a series of proposals, noting that on average principals give rise to 50%–400% more complaints and supervisory cases than other directly authorised firms.  

New rules to note

The FCA is introducing new rules to clarify and strengthen the existing regulatory responsibilities of principals to better hold the latter to account. There is also a requirement to ensure the AR arrangement does not cause undue risk of harm to consumers or market integrity. 

Principals are also now expected to put in place appropriate safeguards where delegating functions or tasks to an AR, assess senior management at an AR for competence and capability, and take reasonable steps to ensure an AR acts within the scope of its appointment.

Annual assessments

The new regime imposes new annual review requirements, including an assessment of each AR’s suitability, fitness and propriety, financial position and the adequacy of the principal’s controls and resources to effectively oversee the AR.

Principals must also complete a self-assessment to monitor whether they are meeting their own responsibilities relating to their ARs. The assessment must be signed off by the principal’s governing body every 12 months but will only need to be submitted to the FCA if specifically requested.

Additionally, principals will be required to conduct an “oversight appropriateness review” when certain “triggers” are met to assess whether controls and resources are adequate for overseeing ARs effectively. These triggers include a change in the AR’s scope of appointment, a change in its target market and a significant increase in complaints received about the AR’s activities or business.

Notifications

Principals are now required to notify the FCA 30 days before an AR is appointed. The new rules include a new finalised definition of regulatory hosting, which covers firms that appoint ARs where the firm itself does not directly carry on the relevant regulated activities other than through its ARs. Principals will be required to notify the FCA of an intention to begin providing regulatory hosting services at least 60 days before starting to provide these services.

More data on ARs

The FCA will also require principals to make available significantly more information about proposed ARs at least 30 days prior to appointing the new AR. This includes the primary reason for the AR’s appointment, information about the nature of the financial arrangements between the principal and the AR, and whether the AR will conduct any non-regulated activities and information on such.

The additional data requirements also apply to existing ARs, which will come into force in December 2022, giving principals 60 days to submit the relevant information to the FCA. Principal firms must likewise notify the FCA if they currently provide regulatory hosting services.

Furthermore, within 60 days of their annual accounting reference date, principals must, in respect of their ARs, verify details as they appear on the Financial Services Register and submit data on complaints and revenue from regulated activities and non-regulated financial activities.

Greater scrutiny 

Misuse of the AR model has certainly caught the FCA’s attention and principals must now comply with a fuller suite of rules and guidance aimed at minimising consumer harm. Appointing and overseeing an AR will now carry a greater procedural burden for the principal, but the requirements are not intended to be prohibitive and are consistent with the principal’s ultimate responsibility for the activities of its AR.

Given the limited implementation period, principals will need to adjust quickly to the reporting and notification requirements of the new regime. This is in addition to the adjustments to principals’ wider oversight processes and controls.

However, there are areas where the FCA has not extended the regime as far as it might have done. Beyond the notification requirement, there are no additional rules or restrictions tailored to firms providing regulatory hosting services, which remains an area under the FCA's review.

Nikki Worden is head of the financial institutions group, Anna Perry is a knowledge lawyer director and Owen Baldwin is an associate lawyer at Osborne Clarke.