Context
The FCA set out its commitment to improving the AR regime within its Business Plan and Strategy and, in December 2022, introduced rules and guidance to improve how Principal firms oversee their ARs. Principals must now provide more information to the FCA about their ARs.
This publication includes data the FCA has collected from the 2021 and 2022 data requests it sent to Principal firms and authorisation information collected from firms. The FCA also outlines how it is improving the Appointed Representatives regime (AR regime) and what it expects from firms.
Key points to note
- The FCA has set up a new AR department to lead its cross-FCA strategy on ARs and high-risk casework.
- While the AR regime has benefits, including encouraging effective competition and providing market access, there is evidence of harm, particularly because of poor Principal oversight.
- FCA analysis showed that Principal firms saw a greater proportion of conduct issues for the revenue generated from regulated activities compared to other directly authorised firms.
- The AR population has ranged between 31,000 to 40,000 between 2007 to 2022 (currently circa 35,000), with the number of ARs in consumer finance growing significantly since 2014 (and is currently the largest sector).
- The FCA expects all Principals to provide high quality oversight and robust monitoring of their ARs to ensure good outcomes for consumers and markets. However, there were outliers that did not perform all the checks or only made them when taking on new ARs. 38% of Principals only perform criminal record checks at onboarding. Examples of checks the FCA expects, on appointment, include:
- appropriate checks on the AR’s financial position;
- making sure they have the relevant experience, knowledge, and skills to carry out the activities for which they are being appointed;
- appropriate checks to assess the AR’s professional reputation, e.g., criminal or civil proceeding checks (incl. insolvency, bankruptcy or winding up orders);
- Checks on appointment are also required for IARs although Principals do not need to carry out the more extensive due diligence required for full ARs.
- It is critical that Principal firms ensure their IARs are sticking to their limited activities and should consider what checks might be appropriate. If an IAR is engaging in activities beyond the terms of the scope of their appointment, they may be committing an offence.
- Overseas ARs (OARs) can present challenges for Principals, including difficulties in understanding and managing legal, accounting, and regulatory requirements for each jurisdiction. They also include potential complications in having effective communications with the OAR due to cultural and language differences and likely challenges in monitoring and effectively overseeing the OAR due to geographical distance. The FCA is using profiling tools and outlier analysis to help it focus on the right firms for supervisory engagement and to learn more about the potential harms and benefits of this model.
- Principal firms with ARs must hold compliant PII to cover the activities of their current and former ARs (including IARs) where required to do so by the FCA’s rules. However, the FCA found that a minority of Principals either held only partial cover or were relying on insurance taken out by the ARs themselves. Through wider supervisory work, the FCA identified firms with incorrect policies that did not cover ARs and had significant exclusions that greatly limited cover – it has taken action to address this and make sure appropriate cover is in place.
- Principals are required to have ‘adequate’ controls over the AR’s activities, and resources to monitor and enforce an AR’s compliance with the relevant requirements that apply to its regulated activities. The FCA has seen Principals with no clear process or structured plans for how they oversee their ARs or where monitoring activities are not carried out in sufficient depth, if at all.
- The FCA also reminds Principal firms to ensure they are complying with the new rules (also refer to the UKGI Bulletin 354, which sets out a reminder about AR Reviews and the Principal firm’s self-assessments) and to check that their ARs are complying with the Consumer Duty.
Next actions
None – for information and awareness.