The Financial Conduct Authority has published its Policy Statement and final rules to the Appointed Representatives (“AR”) regime.

The FCA opened a Consultation to the AR regime in December 2021 (“CP21/34”) and the Policy Statement also responds to feedback to the Consultation.

The changes come into effect on 8^th December 2022. Both principal firms and their ARs are expected to familiarise themselves with the updated rules and expectations and take any necessary steps over the next few months to be ready to comply. The regulator has put in place transitional arrangements to give firms more time to comply in respect of some of the new rules - including the requirement to submit information on an on-going basis and the requirement to review their ARs and self-assess annually.

The FCA will be sending principal firms a request for data (a Section 165 data request) about their ARs (including introducer ARs). Principal firms will then have 60 days to submit the data to the FCA. Firms can begin to prepare immediately as the data the FCA will be requesting is clear in the Policy Statement and relevant forms.

Principals’ regulatory obligations are set out in chapter 12 of the FCA’s Supervision Manual (“SUP 12”). The new rules will introduce new obligations and enhance SUP 12.

Why is the FCA making changes to the AR regime?

In thematic reviews, the FCA identified a wide range of harm across all the sectors where principals and ARs operate. Its findings are that harm often occurs because principals do not undertake adequate due diligence before appointing an AR, and once appointed there is poor on-going control and oversight of ARs.

The FCA analysed a range of FSCS complaints and supervisory case data and found that, on average, principals and ARs cause 60% of the total value of claims to the FSCS. They are also responsible for up to 400% more supervisory cases and complaints than other directly authorised firms (non-principals).

The FCA has updated its cost benefit analysis and increased the estimated costs for larger firms in implementing the new requirements. It still considers that the benefits of the proposals warrant the proposed interventions.

The FCA’s proposals aim to:

• Clarify principals’ responsibilities for their ARs;
• Improve existing oversight requirements;
• Give principals more detail on the circumstances in which it may be necessary to terminate an AR relationship, and if so, how they should ensure that the relationship is wound down in an orderly way;
• Require principals to annually review senior management at ARs and aspects of ARs’ business and activities; and
• Require principals to complete an annual self-assessment of compliance with relevant rules and guidance.

Changes to the AR regime

The Policy Statement (“PS22/11”) seeks to address the areas of change identified by the Consultation and also to meet the objectives outlined in CP21/34, those objectives being:

• Increase consumer protection;
• Reduce consumer harm;
• Enhance Market integrity;
• Drive effective competition.

The FCA is introducing the following key changes to the AR regime under PS22/11:

• Principals will be required to notify the FCA of a new AR appointment 30 calendar days before the appointment takes effect.
• Introducing revenue bands for reporting anticipated revenue of an AR, from regulated and non-regulated activity, during the first year of appointment.
• The time principals have to annually report AR complaints and revenue data will be up to 60 business days after the principal firm’s accounting reference date (rather than 30 business days as proposed in the Consultation).
• The FCA intends to refine the definition of ‘regulatory hosting’ in light of feedback received.  The only effect of firms’ business models coming into scope of the definition of ‘regulatory hosting’ is that these firms will need to notify of their intention to provide such services in advance. The FCA is not proposing any additional rules or restrictions on firms which provide such services, at this time.
• Introducing a requirement for principals to annually review information on their AR's activates, business and senior management. The FCA has clarified that the annual review requirements can be met by principals integrating them into existing internal reporting processes, so long as they continue to meet the standards set out in the rules and guidance.
• The FCA has clarified that the annual reviews can be conducted by responsible individuals with a suitable degree of knowledge and authority below the governing body’s level, with significant issues identified at specific ARs escalated to the governing body.
• The requirement for principals to prepare a self-assessment document, at least every 12 months. This document should be signed-off by the principal's governing body, and be available to the FCA on  request. The FCA has explained that the principal’s self-assessment should focus on how the principal itself is meeting its responsibilities in relation to all of its ARs.

Taking into account the feedback to the Consultation, the FCA has confirmed the following:

• The rules will not apply to firms in the Temporary Permissions Regime (“TPR”) or the Financial Services Contracts Regime (“FSCR”).
• The FCA is not taking forward its proposal that principals must provide information on any non-regulated non-financial activities an AR performs, but will require this information for the AR’s financial non-regulated activities.  Data on ARs’ finances and on the money flows between ARs and principals would help the FCA identify potential issues and decide where to target any interventions.
• The FCA is not taking forward its proposal to require principals to provide, at appointment, an estimation of the proportion of a proposed AR’s non-regulated activities compared to its regulated activities in the first year following the appointment.
• There will not be more information on the nature of regulated activities ARs conduct, and for which the principal takes responsibility, added to the FS Register. The FCA is however planning to make some changes to the information on ARs included on the Register to make it more accessible to consumers and may look to make further changes to the Register in the future.
• The FCA is liaising with the Treasury to explore whether legislative changes are needed.  Any narrowing of the AR regime would mean amending primary legislation, which the FCA does not have the power to do on its own.  The FCA confirmed that it will be considering next steps after publishing the Policy Statement.

If you’d like to discuss how these changes might affect your business, please get in touch.

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