Friday the 13th, warring gods and Appointed Representatives
A superstitious type may find any Friday that coincides with the 13th day of the month as unlucky. The superstition can be traced back to a Norse myth about 12 gods having dinner in Valhalla. Long story short, the mischievous god Loki was not invited and so arranged for Hoor to shoot the host Balder with a mistletoe-tipped arrow.
Balder died and the earth got dark.
Of course, nowadays a barbed comment on Facebook or Instagram by a slighted guest would suffice, but this was how Vikings rolled.
So started the myth of Friday the 13th.
Whilst Friday May 13 2022 has passed without warring gods misbehaving it was none the less eventful. The FCA published a decision not to authorise Alexander Jon Compliance Consulting Ltd.’s (“Alexander Jon”) for authorisation to provide regulatory hosting services.
Whilst there is no detailed definition of what regulatory hosting is, the regulator generally considers it as an arrangement where an Authorised Firm (principal) appoints and oversees a number of unconnected firms as Appointed Representatives (“ARs”).
In October 2020, Alexander Jon applied for authorisation and sought wide ranging permissions including arranging deals in investments and advising on investments. Its business plan was to act as a host to a number ARs, who would in turn, deal directly with retail consumers. At all times Alexander Jon would be responsible for the conduct of its ARs.
The attraction of being an AR is clear. It provides a quicker entry to the UK market than a full application for authorisation, with experienced outsourced compliance support and no capital requirements.
In respect of Alexander Jon, the FCA could not be satisfied that the firm would be able to meet its Threshold Conditions (the minimum requirements for authorised firms). In particular, in the area of non-financial resources. The lack of resources included its ability to supervise its ARs effectively, insufficient staff with the appropriate skill, experience and understanding of the industry.
Considering potential harm to investors, the FCA concluded that Alexander Jon could not demonstrate how its ARs would ensure compliance with good consumer outcomes and that products being offered to retail consumers were appropriate. In any event, the regulator concluded the firm’s proposed business model was neither suitable nor viable going forward.
The bigger picture
The FCA has concerns about the AR model, and has recently launched a dedicated AR department which will focus on the potential harm posed by principal firms and their ARs.
The harm is considered to be particularly high with the FCA finding principal firms frequently lack the skills, resources and expertise to supervise their ARs properly. This in turn is reflected in both the FCA and Financial Ombudsman Service (“FOS”) complaints data.
The regulatory gateway
Increasing scrutiny at the regulatory gateway and reducing the potential harm caused by the ARs are the FCA’s priorities. The regulator has previously looked at the use of ARs in the general insurance sector and issued an alert to principal firms as far back as 2017. The new focus is the use of ARs in the investment management sector where it believes there are over 1,000 ARs and the emergence of principals describing themselves as “regulatory host”.
In February 2021 the FCA intervened against Marshall Sterling Investment Management Ltd, demanding it terminate AR relationships. It has also recently consulted on regulatory changes to the AR regime – including increasing the notification requirements for principal firms and clarifying the expectations of principals.
Later in 2021, HM Treasury called for evidence to better understand how legislative change may be required. Interestingly this may include direct supervision and enforcement to ARs, rather than against just the host.
There is also the prospect of the FOS investigating complaints against ARs direct and extending the Senior Managements and Certification Regime. All of these initiatives reflect an uncompromising approach to the regulation and supervision of Principles and ARs by the FCA.
What should firms do now?
Firms acting as hosts should consider the impact of these developments and undertake gap analysis of their current onboarding procedures and ongoing supervision to ensure they meet the FCA’s expectations.
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