The Appointed Representatives Regime: FCA Policy Statement

At present, the information that principals are required to provide to the FCA is, in its view, limited. To enable the FCA to better assess AR arrangements, the FCA is introducing a number of new information and notification requirements on principals in relation to their ARs. The scope of these requirements is different in relation to introducer ARs (IARs) arrangements, which are subject to lighter-touch requirements.

The key information and notification requirements for principals include:

• 30 days prior notification to the FCA of the proposed appointment of a new AR, with information about the business of the AR. This is a reduction from the 60 day period proposed in the original consultation. The information to be provided includes, by way of example, the primary reason for the appointment, the nature of the regulated activities to be carried on by the AR, and whether the AR will provide services to retail clients.

For existing ARs, the FCA will collect broadly the same information through a section 165 FSMA request which will be sent later this year. Principals will then have 60 days to provide the information.

Under the existing rules in the FCA Handbook, any changes to the information provided must be provided to the FCA within 10 business days of the change.

• Pre-notification to the FCA of any proposed changes to the types of regulated activities carried on by its ARs, at least 10 days before the change takes effect.
  
  
• Verification of the details of its ARs on the Financial Services Register on an annual basis. Principals should confirm to the FCA where information remains accurate and report the new information to the FCA where it has changed.

Transitional provisions: in broad terms, principals will not have to report this information until their first accounting reference date on or after 1 December 2023. See the transitional provision for full details.

• Reporting of complaints data of their ARs and AR revenue information, within 60 business days after the principal's accounting reference date.

Transitional provisions: in broad terms, principals will not have to report this information until their first accounting reference date on or after 1 December 2023. See the transitional provision for full details.

• 60 days prior notification to the FCA before a principal begins to offer "regulatory hosting services". See section 2 below.

While we have set out a high-level summary above, firms should review the detail of the Policy Statement and the made-rules. Firms may also find the FCA's summary of key new rules and guidance at paragraph 2.81 of the Policy Statement useful as a reference point.

The made-rules set out the form in which principals should report and notify the FCA in relation to these new requirements.

These new information and notification requirements will represent a new regulatory compliance burden for firms. For the appointment of new ARs, the 30 day prior notification (and information that has to be provided with the notification) may well be inconvenient and slow down the speed at which new products can be launched. Equally, the ongoing requirements will require principals to allocate additional resources to their AR arrangements and ensure they have access to the information that has to be reported to the FCA – which, in turn, might require principals to amend their contractual agreements with ARs and/or introduce new systems, controls and procedures.

In addition to increased information and notification requirements, the FCA is introducing rules and guidance in the FCA Handbook to strengthen the obligations on, and the FCA's expectations of, principals in relation to their oversight of ARs. Some of these obligations and guidance are switched off in relation to IARs. 

The rules and guidance being introduced under the Policy Statement include:

• Obligations to carry out self-assessments: This is, perhaps, one of the most significant changes. Under the new rules, principals need to prepare an annual "self-assessment" document which sets out how it has complied with its obligations as a principal in relation to all of its ARs. The self-assessment will also apply in relation to each principal's arrangements with IARs insofar as the underlying obligations apply in relation to those IAR arrangements.

Importantly, the self-assessment must be signed-off by the principal's governing body at least every 12 months – a requirement no doubt intended to bring AR arrangements to the forefront of the minds of senior management and help ensure stronger governance in relation to AR arrangements.

Although principals are not automatically required to share their assessment with the FCA, they must provide it if requested.

Transitional provisions: to give firms time to prepare (and approve) their self-assessments, principal firms will not need to have their first self-assessment approved by their governing body until 30 November 2023.

• Obligations to support the oversight of ARs by their principals, including through annual reviews: To help ensure that principals are properly overseeing and monitoring their ARs, various new obligations (and related guidance) are being introduced. These obligations apply to principals and touch on matters such as:

• • ensuring that principals have "controls and resources" which are "adequate" at all times (and the circumstances in which these should be reassessed);
    
    
  • ensuring that, when an AR is appointed and on an ongoing basis, the activities of the AR do not "result in an undue risk of harm to the consumers or market integrity"; and
    
    
  • annual reviews of ARs (different to the self-assessment outlined above), including in relation to the fitness and propriety of AR senior management and the AR's financial position.

Transitional provisions: principals have until 30 November 2023 to complete their first annual reviews. 

• Guidance to clarify the responsibilities of principals: This guidance is designed to clarify the FCA's expectations on principals. The guidance covers topics such as: steps principals should take when delegating functions or tasks to ARs (in particular, in relation to enhanced monitoring and conflicts of interest); assessing the competence and capability of the senior management of ARs (and factors to consider when undertaking that assessment); and what the FCA considers to be "reasonable steps" to take when a principal is monitoring whether their ARs are acting within the scope of their appointment.

Firms will need to think through these new rules and guidance carefully, and consider, amongst other things, the following in respect of their arrangements with ARs:

• Do principals need to introduce new, or improve existing, systems, controls, and procedures to ensure they have proper oversight of ARs?
  
  
• Do principals need to allocate more resources to ensure they can properly comply with their obligations as principal and monitor and oversee ARs?

While we have set out a high-level summary and some practical considerations above, firms should review the detail of the Policy Statement and the made-rules. Firms may also find the FCA's summary of key new rules and guidance at paragraph 3.83 of the Policy Statement useful as a reference point.

Principals will need to review their AR agreements to ensure they satisfy the new rules, which require contracts to include specific provision on termination and contractual rights to enable principals to oversee the activities of the AR. These cover:

• Obligations and guidance in relation to the termination of AR agreements and wind-down plans: This includes guidance on the circumstances in which a principal should terminate its relationship with an AR, and an obligation to take "reasonable steps" to help an AR execute an orderly wind down, where this is necessary. The contractual arrangements between a principal and its AR are also required to contain a provision permitting the principal to terminate the arrangement if it is no longer able adequately to oversee its AR.

Transitional provisions: principals do not need to make amendments to their contractual agreements with ARs to comply with this obligation until the first renewal or revision point for the agreement after 8 December 2022.

• Other contractual requirements: In addition to the termination right outlined above, there are further new requirements for contractual arrangements between a principal and its ARs, including provisions for the communication of data and to facilitate effective oversight.

Transitional provisions: there does not appear to be a transitional provision in respect of these other contractual requirements.  Many contracts will already address the requirements in sufficiently broad terms, but principal firms should check this.

Notwithstanding the increased compliance burden, many firms will no doubt be pleased to see that the "regulatory hosting" model has not been targeted, at least not at this stage, in as material a way as might have been anticipated following the original consultation. Firms should nonetheless ensure they apply robust controls where offering "regulatory hosting services", and ensure they comply with the new rules and guidance being introduced.  

The definition of "regulatory host" has also changed slightly from the original consultation, following feedback that it was too wide. The definition is focussed, fundamentally, on models where a firm (the "host") agrees to appoint ARs for remuneration (i.e. with a view to profit) and where, either: (1) the host does not carry on any regulated activities other than through its ARs; or (2) the regulated activities of the principal are not connected to the regulated activities carried on by its ARs.

The changes to the AR regime form part of the wider, ongoing reform of UK financial services regulation and, in particular, the FCA's focus on the retail markets and protecting consumers.

Earlier this year, the FCA published its policy statement on its new Consumer Duty (PS22/9) and final non-FCA Handbook guidance on that new Consumer Duty (FG22/5). At its most fundamental, the Consumer Duty is a "new Consumer Principle that requires firms to act to deliver good outcomes for retail customers" – it sets the standard of care for firms when providing services or products to consumers in the retail financial markets.

In the Policy Statement, the FCA is clear that the Consumer Duty also supports the outcomes sought by the FCA in amending the AR regime. Principals should also keep the Consumer Duty, and the related rules and guidance, in mind when reviewing their AR arrangements. It may not be sufficient for principals to focus only on the changes to the AR regime – they will also need to think holistically about the Consumer Duty to ensure their AR arrangements are appropriate.

The FCA continues to work with HMT to consider potential ways of reforming the legislative framework for ARs. This work follows the discussion and options outlined in HMT's call for evidence on the AR regime, which explored some more fundamental changes to the regime. The options include:

• changes to the scope of those regulated activities in relation to which ARs can be appointed;
  
  
• introducing a new permission for firms to act as a principal;
  
  
• extending (parts of) the Senior Managers & Certification Regime to the AR regime – at present, ARs are subject to a modified version of the pre-SMCR approved persons regime; and
  
  
• extending coverage of the Financial Ombudsman Service to cover ARs.

Feedback on these proposals is still awaited, but in the Policy Statement the FCA outlines feedback from respondents on various other areas of potential policy change – which might be addressed with further change in the future.

As we outlined in a briefing as part of our Alternatives Insights series, the attention on the AR regime in the original consultation and call for evidence – and now in the Policy Statement – is neither new nor surprising. In 2019, the FCA completed a review of principal firms in the investment sector and "identified significant shortcomings in principals' understanding of their regulatory responsibility for their ARs". Among other things, the FCA found that principals did not exercise sufficient oversight over their ARs and did not have sufficient control over the business for which they had accepted responsibility. An influential UK parliamentary committee also published a report on the failure of Greensill Capital (itself an appointed representative) which recommended (among other things) that the FCA and the government should consider reforms to the regime, noting that it was being used for purposes way beyond those envisaged when it was established in 1986 "for self-employed salespeople". 

At the same time, the AR regime is used in different ways in different sectors – often with productive outcomes for the market and the FCA. Larger asset managers, for example, often use the regime to help group companies launch new products quickly, subject to a robust group-wide compliance framework. Indeed, in its discussion on "regulatory hosting" in the Policy Statement, the FCA noted that respondents had argued that "the oversight applied by the principal under this model was [often] stronger than if the fund manager were directly authorised". 

Clearly, there is a balance to be struck when considering more fundamental amendments to the AR regime. While the market will be focussed on the specific changes being made under the Policy Statement now, this is not necessarily the end of the story for the AR regime – and we will continue to monitor the developments in this space.

If you would like further information or assistance in understanding the changes to the AR regime, please speak to your usual Travers Smith contact or any of the individuals below.