'More to do' – UK FCA reviews principals' oversight of appointed representatives
Published on 27th Sep 2024
FCA analysis finds some principal firms are taking a 'bare minimum' approach and are not 'getting the basics right'
The Financial Conduct Authority (FCA) recently published its findings following a review of how principal firms are monitoring and overseeing their appointed representatives (ARs), including introducer ARs. The review takes into account the reforms which were introduced by the FCA in December 2022 and which were intended to strengthen the rules around principals' oversight of their ARs.
The FCA's review
The review looked at 10% of firms currently acting as principals under the AR regime (approximately 270 firms were randomly selected) and largely used a telephone questionnaire, with 23 firms being selected for in-depth assessment. While examples of good practice were identified, the FCA has concluded that areas for improvement remain.
What did it find?
The FCA identified areas of good practice and areas for improvement in each of the following:
- self-assessments;
- annual reviews;
- monitoring, oversight and acting out of scope;
- approach to onboarding ARs;
- termination, offboarding and orderly wind-down.
While the FCA found principals had made "some effort" to comply with the new rules, they were also often over-confident when assessing how effectively they implemented the new rules in various areas.
Self-assessments or annual reviews
A principal firm's governing body must review and approve, at least once every 12 months, a written record of the firm's assessment of meeting its compliance with its continuing obligations under the FCA Handbook, Supervision Sourcebook (SUP 12). This is known as a "self-assessment" document.
Principals must also undertake an annual review of their ARs to assess, for example, the fitness and propriety of the AR's senior management, the financial position of the AR, and the adequacy of the principal's control and oversight over the AR.
The FCA found that a number of firms had not completed their self-assessment or annual review. Of those it studied that had completed them, a significant percentage were deemed to be of insufficient quality.
Practices that the FCA flagged as areas for improvement included:
- principals adopting a tick-box approach rather than a focused and specific assessment/review;
- insufficient documentation of the assessment/review, including a lack of detail and evidence, or using a template that did not cover all the necessary points;
- not assessing ARs in sufficient depth or relying on a self-declaration from the AR that it complies with the FCA rules; and
- failure to show that the assessments were signed off by the principal's governing body at least every 12 months.
Monitoring, oversight and acting out of scope
FCA rules require principal firms, when they agree that a firm can act as its AR, to enter into an AR agreement specifying what regulated activities the AR is permitted to carry out. The principal should ensure that, within that AR agreement, it also has adequate controls in place to monitor and enforce the AR's compliance with the FCA's requirements for those activities. In particular, prescribed contractual terms required under SUP 12 must be included.
The FCA found that the nature and extent of compliance monitoring varied between firms, with data-based assessments being the main method used and in-person meetings or assessments of consumer-facing materials being less common.
Practices flagged for improvement included:
- principals not understanding the AR's business model or not reviewing consumer-facing materials and interactions;
- treating monitoring as a tick-box exercise and not addressing issues identified; and
- not having adequate resources to monitor and oversee ARs or conducting monitoring informally.
Onboarding, termination, offboarding and orderly wind-down
Onboarding and offboarding are key areas for principals to monitor. When onboarding a firm as an AR, it is important to ensure that the firm is financially stable and suitable to act as an AR. When terminating or offboarding ARs, principals should ensure that there is an orderly wind-down of the business.
In this regard, the FCA found that there were a number of areas for improvement, including principal firms:
- having sole reliance on automated background checks and having limited human oversight;
- having an inadequate understanding of the required contractual terms set out in the regulations at SUP 12;
- failing to monitor AR's websites after termination to assess if they reflected the removal of permissions; and
- principals not having a mechanism for reviewing if/when it is appropriate to terminate AR arrangements.
Osborne Clarke comment
The review demonstrates that oversight of ARs (including introducer ARs) continues to be an area of focus for the FCA, even after the 2022 reforms. The FCA continues to drive improvements in regulatory standards, to ensure that principal firms are adequately monitoring and overseeing the activities of their AR firms.
The FCA's findings are also relevant for firms considering being appointed as an AR. A contested point we often see in negotiations between principals and ARs when negotiating AR agreements is that principals will seek quite wide-ranging and intrusive provisions around monitoring, oversight and audit, something that prospective ARs will often find themselves uncomfortable agreeing to. These latest comments from the FCA, however, demonstrate the detail and extent of continuing monitoring that principals are expected to undertake.
