The appointed representatives (AR) regime is under review and changes are coming. We wrote about the reforms last month here. Since then HM Treasury has published its Call for Evidence and FCA has launched its Consultation on improving the regime.
The Treasury Call for Evidence – what firms need to know
The Treasury is seeking views on four key aspects of the AR regime, reform of which would require legislative change:
• the scope of the FSMA section 39 exemption (which allows authorised firms to appoint non-authorised persons to carry on certain regulated activities, for which they accept regulatory responsibility) - for example, by restricting the activities and financial products in which ARs are allowed to engage, by limiting the size of ARs to make sure principals can properly oversee them, and/or by requiring principals to be carry on the same regulated activities as its ARs to ensure appropriate principal expertise and oversight.
• enhancing the role of and regulatory tools available to the FCA - for example by a 'principal permission gateway' enabling the FCA to assess a firm's fitness to act as principal (similar in principle to the financial promotions gateway which we wrote about here) and/or the establishment of direct information gathering and investigation powers in relation to ARs.
• imposing more direct regulatory requirements on ARs - for example extending the Senior Managers and Certification Regime to ARs in place of the more limited accountability regime for ARs with the aim of raising standards of fitness and propriety in AR firms and helping to reduce the risk of consumer detriment.
• reviewing the role of the Financial Ombudsman Service (FOS) – for example an amendment so that a principal is responsible, and the FOS is able to provide redress, for all of an ARs activities, even where the AR's activity is not covered by an agreement with the principal (whether due to administrative error or because the AR has acted beyond the regulated activities its principal has contractually accepted responsibility for).
FCA Consultation
The FCA's Consultation Paper (CP) focuses on two main areas of change:
• additional information on ARs and notification requirements for principals: the FCA is consulting on the requirement for principals to provide information about the AR’s business and revenue, complaints against the AR, and the AR’s regulated and non-regulated activities. The proposals, including the reporting timeframes (details must be provided at least 60 days before an AR appointment, with changes reported 10 days before they take effect and ongoing reporting obligations on complaints and revenue) will require significant principal firm engagement.
There is some dovetailing here with the possible review of the FOS role in the Treasury's Call for Evidence as the FCA proposes that information about the nature of the regulated activities the AR carries on, for which the principal takes responsibility, is included in the Register. This would provide consumers with greater clarity as to whether they might have recourse to the FOS (under current rules) if things go wrong, as consumers could, in theory at least, check the types of regulated activities which ARs are and are not permitted to undertake, and so avoid instances in which an AR operates outside of its agreement with the principal.
Similarly, the proposed requirement to provide revenue information, aimed at enabling the FCA to better assess the size of ARs and the potential impact their business might have on the principal’s ability to pay any redress for harm, ties in with the Treasury's considerations on limiting the size of ARs.
• clarifying and strengthening the responsibilities and expectations of principals and providing additional guidance for principals on their responsibilities: The FCA is consulting on extensive proposals clarifying principals’ responsibilities for their ARs and the FCA's expectations, overseeing ARs effectively, terminating AR contracts and winding down, and self-assessment by principal firms on their compliance with their regulatory requirements on ARs.
A raft of proposed new FCA guidance is being proposed including on how management at principal firms should review on an annual basis the fitness and propriety of senior management at their ARs, what principal firms should do to make sure their ARs act within the scope of their appointment, the systems and controls principal firms should have in place to oversee ARs to a comparable standard as if they were an individual directly employed by the principal and the activities being undertaken by the AR were in-house at the principal.
The CP also seeks views on 'regulatory hosting arrangements' (where the principal oversees the use of its permissions by ARs rather than carrying on any substantive element of a regulated activity itself) and business models where ARs are large in size relative to the principal.
Next steps
The Call for Evidence and the CP both close on 3 March 2022.
Both the FCA and the Treasury seem to be mindful of the careful balance which needs to be struck to ensure the proposals address potential AR regime harms without detracting from the benefits of the regime. The AR regime allows firms to provide regulated activities without the cost and compliance obligations of full FCA authorisation, and in doing so helps ensure consumers have access to a wide variety of products and services. When functioning properly the AR regime benefits consumers.
While many of the proposals clarify or enhance existing requirements so may not be unduly onerous on well-run principals, the FCA estimates around 10% of principals and ARs may leave the market as a consequence of the proposed reforms. Some of those may apply for direct authorisation and others may leave the market completely. In the FCA's view this is no bad thing if it reduces the number of ARs in the market with the highest potential to cause harm through poor conduct.
The levels of oversight being proposed in the CP are likely to be higher than those currently in place for many principal firms, and the information requirements will be a considerable step-up for principal firms, particularly those with high numbers of ARs. Affected firms should familiarise themselves with the detail of the proposals and follow developments closely.
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