FCA changes for Appointed Representatives

summary

The New Rules aim to enhance the AR regime through new requirements and guidance. As a result, the FCA expect to get better and more timely data on ARs and principals and identify potential risks and necessary target interventions.

The FCA divided the requirements into two large topics: (1) information and notification; and (2) responsibilities of principals and expectations, which include the provision of additional data (e.g. nature of the regulated activities performed, complaint data, revenue information, etc.), notifications, enhanced due diligence, oversight requirements, guidance and annual self-assessment.

ARs additional data and notification

To better understand the firm’s business model and potential risks to market integrity and consumers, the FCA will be requiring additional information from new and existing ARs, which includes:

• principal explanation of the primary reason for the AR appointment;
• the nature of the regulated activity AR is permitted to carry on;
• if the AR will conduct any non-regulated activities, and which;
• if the AR will provide services to retail clients;
• if the AR was previously an AR of a different principal and the reason for termination;
• if the AR is part of a group and the name of the parent undertaking;
• if any individual from the AR will be seconded to the principal to carry on portfolio management and/or dealing activities and the rationale for such arrangement;
• estimated revenue from regulated and unregulated activities in the first year of appointment;
• the nature of the financial arrangement between principal and AR;
• annual submission of revenue data for each of their ARs;
• data in revenue from regulated activities and financial non-regulated activities;
• data on revenue from non-financial non-regulated activities (reported in bands);
• checks and notification of changes of AR details on the Register; and
• annual complaint data for all principals’ ARs.

For the Introducer Appointed Representative (IARs), the FCA is requiring significantly less data than “full” ARs. This considered the limited scope of IARs and their lower potential risk.

These could be challenging for principal and AR firms because although they have access to the required information, it might not come in an easy reporting format to comply with the notification requirements and timeline proposed by the FCA.

For notifications, the FCA established that firms would have to notify within 10 business days of any significant change planned with the AR. For new appointments, 30 calendar days’ notice is required and for changes in regulated activities, at least 10 calendar days’ notice before the change takes effect is required. Revenues and Complaint data should be submitted within 60 business days after the principal’s ARD.

principal responsibilities and expectations

To enhance and clarify the expectation and responsibilities of principal firms and ensure effective oversight of ARs, the FCA has included the following requirements:

• Principal responsibilities for their ARs, include ensuring that delegated functions or tasks do not represent a conflict of interest and are subject to enhanced monitoring; considering guidance on how to practically assess senior management at ARs; and considering guidance on what the FCA consider ‘reasonable steps’ to be.
• Effectively Overseeing ARs, which includes ensuring their controls and resources are adequate at all times (if inadequate, they should notify the FCA and if not resolved, postpone or terminate the appointment); re-assess if their controls and resources remain adequate and review contractual relationship in case of rapid growth; have systems and controls in place to oversee the AR as if they were an individual directly employed by the principal; ensure the appointed AR and their activities do not or will not result in an undue risk of harm to consumers or market integrity; conduct a review of each AR at least every 12 months to assess senior management ability, financial position, and adequacy of controls and resources to oversee the AR; and arrange on-going oversight to the AR.
• Termination of AR contract and winding down, which includes considering proposed guidance on circumstances in which they should terminate relationships; and taking reasonable steps to assist ARs to wind down in an orderly way, where they decide it is necessary.
• Self-assessment document performed every 12 months which should focus on the principal (in relation to all its ARs) to demonstrate their compliance with all obligations and identify risks and gaps in compliance.

next steps

The FCA has been also working with the Treasury to explore potential legislative changes. The Treasury’s Call for Evidence had gathered views on the objectives, benefits, scope, and risks of the AR regime and should set the next phase of the AR regime.

The firms affected by the New Rules will need to take the necessary steps over the next few months to be ready to comply, including gathering information from existing ARs, assessing any potential gaps, engaging ARs with the compliance requirements, integrating the regulatory oversight in the governance framework and senior management accountability, updating all necessary internal policies, and amending the AR agreements.

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