Following recent changes to the Authorised Representative's regime, Tara Swaminathan and Oliver Wannell sum up key things to consider for Principals and Appointed Representatives, as well as deadlines not to be missed.
In December 2021, the Financial Conduct Authority (FCA) released a consultation paper on the Authorised Representative’s (AR) regime. The aim of the consultation was to look at ways to reduce harms that consumers face following their involvement with AR firms.
The FCA accepted that there are many benefits to the AR model, however in its current form, harm occurs because Principals are either not undertaking sufficient due diligence in the pre-appointment stage, and/or there is poor ongoing control and oversight of an AR by its Principal after an appointment has been made.
The subsequent policy statement, released in August 2022, set the tone of the FCA’s current approach: a proactive, robust, outcomes-focussed regulator, with a focus on reducing consumer harm and the tightening of regulation in the financial services sector, post-Brexit. This is all with a view of the UK remaining an attractive destination for financial services businesses, consumers and investment.
Mainly, changes relate to the governance, oversight and control requirements of Principals.
The policy statement addressed businesses whose primary/sole income is derived from being a Principal to a network of ARs (referred to as “regulatory hosts”). Whilst the policy statement itself took a relatively light-touch approach with these firms, it’s likely that in time, these networks will come back into the FCA’s focus.
The FCA has put out a useful summary of the key changes here.
A Principal will need to show the FCA that steps have been taken to assess an AR before its appointment. This includes ensuring the AR is financially stable, that its personnel have been assessed to be ‘fit and proper’, and identifying whether the AR is “suitable”, i.e. having the capacity, to carry out the activities it proposes to do so. All of this – at a minimum – should be covered off in a Principal’s documentation via its policies, procedures or agreement between a Principal and its AR.
Ongoing responsibilities – these will include (but aren’t limited to) increased data gathering and reporting requirements. Principals need to understand which of their ARs activities are regulated and those that aren’t regulated, but financial in nature. This second point is new courtesy of the policy statement and feeds into the onus of governance and oversight of an AR resting solely with its Principal. At present, the FCA is not – and hasn’t shown that it will be – concerned with any non-financial unregulated activities.
Data gathering – Principals have to provide the FCA with a breakdown of revenue and complaints data (which is more detailed than before) and ensure that it has adequate procedures in place to ensure that ARs act within the scope of their appointment, being able to identify when the scope/capability of an AR changes, especially if that change results in a detriment to consumers.
The new AR regime requires Principals to carry out annual reviews and self-assessments, part of which will feedback into the Principal’s own regulatory reporting requirements. The (annual) self-assessment document must be signed off by the Principal’s governing body.
Inadequacy of an AR – where a Principal is no longer able to adequately monitor and oversee its AR’s activities, (e.g. if the AR firm grows to a size that is no longer manageable for the Principal), the Principal will need terminate the arrangement. If the arrangement is terminated, (for this, or any other reason), the Principal will be required to:
For Appointed Representatives
Whilst the policy statement focuses on Principals; AR firms should also be aware of the upcoming changes to the regime.
ARs will need to understand (and start collecting) the information and data as requested by its Principal. AR firms may want to consider if the data requests are fair and in line with the regulatory changes, or not. ARs are also likely to be entering into amended, or new contracts with their Principals, in light of the upcoming changes. Having an understanding of the changes to AR regime, will inevitably assist in any contract (re)negotiations.
It’s worth noting that the new Consumer Duty applies to all firms in the distribution chain selling products and services to retail customers). It will therefore apply to all relevant ARs and Principals; Principals, in particular, will need to consider the steps they need to take to meet the new duty alongside the changes to the AR regime.
We can review your existing AR agreements, procedures, policies and processes to check compliance with the upcoming changes; provide advice on the design/structure of existing or future sales models, advice on the application of the regulations to your business model, or horizon scanning advice, or you can simply sign-up to our newsletter. We regularly provide support to Principals, ARs and networks and would be happy to assist however you need us. Please get in touch at email@example.com for an initial chat.