FCA improves its appointed representative regime amid UK consumer-harm concerns

The UK Financial Conduct Authority (FCA) has set out new rules in relation to the UK appointed representatives (AR) regime (PS22/11). The changes will take effect on 8 December 2022 following a four-month implementation period.

The rules will affect all firms that currently have an AR or intend to have an AR in the future – and ARs themselves. However, they will not apply to firms in the Temporary Permissions Regime or firms that are winding down their UK business as a result of the post-Brexit loss of passporting.

After Greensill

The AR regime is a longstanding feature of the UK financial service landscape and allows a person (the AR) to carry out certain regulated activities without being authorised by the FCA themselves. As the principal firm must be authorised by the FCA, the AR is able to operate under the cover of the principal's licence. The principal remains ultimately responsible for the regulated activities performed by the AR.

Following the failure of Greensill Capital, the UK supply-chain finance group that made use of the AR model , the FCA was asked to consider reforms to the AR regime, with the aim of limiting its scope and reducing opportunities for misuse. There have been particular concerns over regulatory hosting, where firms that appoint ARs do not directly carry on the relevant regulated activities other than through their ARs.

In December 2021, the FCA published its consultation paper,  "Improving the Appointed Representatives regime"  alongside HM Treasury's call for evidence, an information gathering exercise on how market participants use the AR regime and how effectively the regime works in practice. 

The consultation paper set out a series of proposals to improve the regime, noting that on average principals give rise to 50-400% more complaints and supervisory cases than other directly authorised firms. The policy statement was published in August 2022 and sets out responses to the proposed changes, the FCA's feedback and the final rules.

Regulatory responsibility 

In an effort to reduce the risk of consumer harm, the FCA is introducing new rules to clarify and strengthen the regulatory responsibilities and expectations of principals. Although principals are already responsible for the activities of their ARs, the FCA clearly sees a need for additional specific rules to help principals meet the FCA's expectations and to better hold principals to account.

In particular, the new rules cover principals putting in place appropriate safeguards where principals delegate functions or tasks to an AR, assessing senior management at an AR for competence and capability, and taking reasonable steps to ensure an AR acts within the scope of its appointment.

Oversight of ARs

There will also be new oversight requirements to assess whether principals' controls and resources remain adequate for overseeing their ARs effectively. For example, principals will be required to consider a list of circumstances that will trigger an "oversight appropriateness review". These triggers include a change to the AR's scope of appointment, a change in its target market and a significant increase in complaints received about the AR's activities or business.

In addition, there will be a direct requirement to ensure that the activities of the AR do not result in an undue risk of harm to consumers or market integrity, as well as new rules on the termination of AR contracts and the orderly wind down of an AR's business. 

Annual assessments 

The new regime will impose new annual review requirements, including an assessment, at least every 12 months, of each AR's suitability, fitness and propriety, financial position and the adequacy of the principal's controls and resources to effectively oversee the AR. Following feedback from firms, the FCA confirmed that this requirement can be achieved by principals integrating the assessments into existing internal reporting processes. The FCA also clarified that the annual reviews can be conducted by "responsible individuals" with suitable knowledge and authority below the level of the governing body with any significant issues escalated to the governing body.

Additionally, principals must complete a self-assessment to monitor whether they are meeting their own responsibilities in relation to each of their ARs in the form of a single document designed to identify any risks and gaps in compliance with the firm’s obligations as a principal. The FCA has made clear that the assessment must be reviewed and signed-off by the principal's governing body at least every 12 months but will only need to be submitted to the FCA if specifically requested.

Osborne Clarke comment 

Misuse of the AR model has certainly caught the FCA's attention and principals must now comply with a fuller suite of rules and guidance aimed at minimising consumer harm.

However, while the new rules do increase the burden on principals in the interests of preventing misuse of the AR model and the consequential risk to consumers, there are areas where the FCA has not extended the regime as far as it might have done.

For example, beyond a notification to the FCA, there are at present no additional rules or restrictions tailored to firms providing regulatory hosting services, which is an area of particular concern for the UK regulator. However, potential harm associated with the regulatory hosting model remains an area under the FCA's review and further changes may yet be proposed in the near future.

This is the opening Insight in our two-part series on the FCA's AR reforms, which will next look at new data and reporting rules and the steps principals will need to take to get up to speed with the regime.