Written by Peter Wilson – Manager
Appointed Representatives (ARs) are a common way for principal firms to grow their business without the need to go through the sometimes costly and time-consuming FCA authorisation process. The principal and AR relationship also provides the opportunity for the AR to grow a brand and business separately from the principal firm. It is a relationship that can work well, although it is not without risk. The FCA’s focus on governance and the recent rise of ‘hosting’ and ‘umbrella’ firms has again brought this business and oversight risk to the fore.
ARs and agents are commonplace across the financial services sector, particularly in sectors such as Insurance, Life and Pensions, Investment Management, and Consumer Credit. The nature of the relationship between a principal firm and an AR will always ensure it is a key area of focus for the FCA. A look back through the vaults provides a useful reminder to firms of this focus and the regulator’s key messages about ensuring adequate risk management and oversight arrangements.
Material publications in this area include:
1) FCA– APR and coronavirus: our expectations – December 2020 update
The FCA reminded regulated firms that whatever the activities of their ARs, the principal firm remains responsible for ensuring that ARs meet the rules. Principals are to ensure that:
- The controllers, directors, partners, proprietors, and managers of the AR are fit and proper
- The AR is solvent and suitable to act for the firm
- The principal has adequate controls over the AR’s activities
- The appointment does not prevent the firm from satisfying and continuing to satisfy the threshold conditions, and
- The principal is able to monitor and enforce compliance with relevant requirements.
2) FCA expectations of principal firms in the investment management sector 2019
The FCA conducted additional research into principal firms in the investment management sector, specifically examining whether principals understood and complied with their regulatory responsibilities relating to their ARs. The review identified “significant shortcomings” in principal firms’ understanding of their responsibilities for their ARs.
It found that most firms had weak or under-developed governance arrangements – which meant that directors were unable to adequately discharge their responsibilities of providing oversight and direction.
The absence of effective risk frameworks meant that many principals failed to assess their ability to effectively oversee prospective ARs. This was particularly acute where ARs could operate outside their principals’ core areas of expertise.
A number of other negative factors were identified, including capital adequacy, ongoing monitoring, and the risk of consumer harm presented by misuse of registration of ARs in the CFD sector.
The findings were followed up with a ‘Dear CEO’ Letter in May 2019: “FCA expectations of principal firms in the investment management sector”.
3) FCA Thematic Review and Dear CEO letter 2016
In July 2016 the FCA published the results of a thematic review into principal firms’ supervision of their ARs in the general insurance sector. (TR16/6 Principals and their appointed representatives in the general insurance sector). The review uncovered widespread shortcomings in principal firms’ awareness and understanding of the FCA rules and guidance, and in compliance with the requirements.
The thematic review was followed up by a ‘Dear CEO’ letter, which clearly laid out the need for firms to meet their obligations under SUP, PRIN, SYSC, ICOBS, CASS, and their Threshold Conditions. The FCA required firms to consider the thematic report and demonstrate that they are meeting requirements.
What do we see in the market?
In our experience, firms still have work to do in order to meet the regulator’s expectations. Principal firms are not adequately monitoring performance indicators nor assessing the business risks that each AR presents. Risk scoring for ARs and the associated monitoring could be improved. The FCA has repeatedly indicated its irritation at principal firms being unable to show close and continuous monitoring of their ARs. The clear suggestion by the FCA is that firms initial and ongoing risk assessments have room for improvement with insufficient resources to monitor the risks that ARs present.
The FCA is taking action against principal firms where it is apparent that they are failing to adequately monitor their ARs, and where the AR has either gone insolvent, treated customers poorly, or has not adequately segregated client funds. FCA enforcement in this area includes private warnings, restrictions on business activities, and financial penalties.
What should firms be doing instead?
Firms should take a close look at their governance and oversight arrangements to ensure that they are monitoring their ARs appropriately.
| Common failings | FCA’s expectations |
| Risk Management – inability to demonstrate consideration of the risks associated with the activities of a principal’s ARs or the risks associated with their customers. | Effective risk management – Principals should assess how appointing ARs would impact their business and have appropriate frameworks to manage the risks arising from AR activities. |
| Understanding obligations – Lack of understanding of the extent of regulatory responsibilities principals have for their AR’s activities. | Compliance arrangements – Principals should ensure ARs are solvent, and that AR owners and senior managers are ‘fit and proper’. |
| Oversight and control – Not demonstrating appropriate oversight or effective ongoing monitoring of an AR’s regulated activities. | Effective control and monitoring – Principals should possess adequate resources to effectively control and monitor their ARs and to enforce compliance with relevant rules. |
| Culture – Failure to ensure that ARs operate with an appropriate culture. | Customer outcomes – Principals should be able to demonstrate a culture aligned to good customer outcomes. |
Is your AR strategy robust? Can you adequately provide oversight and monitor your ARs? Are your ARs delivering the customer experience and regulatory outcomes that you would wish to deliver yourself?
The Solution – About Complyport
Complyport is a regulatory governance, risk and compliance consulting firm supporting the UK financial services industry for over 20 years.
We specialise in providing Governance, Risk and Compliance services to firms. Complyport has advised and successfully assisted over 1000 firms in becoming authorised with the FCA and to comply with the rules and requirements of regulators on an ongoing basis. We help firms change, grow, and excel through expertise, insight and innovation.
Complyport’s multidisciplinary consultants possess deep expertise in their field, having acted in FCA skilled person reviews, as expert witnesses in legal cases and as expert investigators for firms or their legal advisers.
Complyport offers full support across the regulatory landscape including advisory, assurance, financial reporting, capital adequacy assessments and compliance training as well as a suite of online RegTech and fully electronic KYC solutions to enable continued compliance with regulatory obligations.
