FCA and the Treasury renew focus on Principle Firms and their Appointed Representatives


FCA: Regulatory Hosting model about to be improved?

Following the publications of the Lessons from Greensill Capital, Sixth Report and the Responses to the Committee’s Sixth Report, it is likely that the regulatory hosting model is about to be improved. Principal Firms will be subject to more scrutiny and may be required to increase oversight and controls of their Appointed Representatives (AR’s).

Chancellor of the Exchequer, Rishi Sunak, from Her Majesty’s Treasury (“the Treasury”) commented in the Greensill Report that “the Treasury plans to issue a Call for Evidence to gather views from stakeholders on the overall aim, scope, benefits and risks of the current AR Regime”. This was in response to a call for clarity into his former colleague David Cameron’s part in Greensill Capital. The industry will probably benefit to some degree from the review, although there is a risk that the reaction may be maladjusted and reduce the benefits of ARs. The effects are likely to be felt the most in the wholesale sector, where the AR regime has provided a long-standing benefit to the City of London and the British economy. Britain was one of the few countries in the EU (whilst still a member) that permitted unregulated firms to carry out regulated activities under a regulated ‘host’. This was akin to the existing EU model which permits firms to register “tied agents” but differs in structure and scale. The AR regime provided a clear infrastructure for UK regulated firms to host ARs. The EU does not offer the same and is not as popular among firms and regulators alike.

The Treasury has already started work to review the regime, and as part of this will consider legislative reforms with the ambition to strengthen the oversight of ARs and prevent the abuse of the regime. Rishi Sunak continued by saying “In my view, strong and effective oversight of appointed representatives is essential for safe operation of the regime.”

Per the Treasury’s Fifth Special Report of Session of 2021–22, the Treasury reassured that the FCA welcomes the recommendation that the FCA and the Treasury should consider reforms to the AR regime. In doing so, the Treasury mentions that “the FCA and the Treasury [will work] to determine the most effective ways to reduce opportunities for misuse of the regime, including whether limiting the scope of the AR regime is a necessary and effective way to achieve this”.

Alongside the possible limitations on non-regulated business that AR’s can undertake, the regulatory host model as a whole will be subject to changes, which we understand may include thresholds on scale and scope of the AR regime to smaller levels of activity.

Referencing the changes to the AR regime, Nikhil Rathi (CEO of the FCA) contributed to the Greensill Report, stating that FSMA permits a “very wide range” of activities which is currently limited to everything besides deposit-taking and managing fund vehicles, therefore, there is a need to look much more closely at the systems of control that the principal has in place, potentially placing some restrictions on the scale of business that can be undertaken through this mechanism”. What is important to note is that the AR regime is mostly used for retail insurance or mortgage business. Whilst to most of our readers the AR regime will only be familiar as a wholesale solution to distribute financial products or advise on investments. Nevertheless, all such activities do require proportionate vigilance and expertise. Betterment of the FCA’s control over and the expected systems and controls of Principal firms is a welcomed change.

What is the reasoning behind the changes?

The FCA had previously conducted a thematic supervisory review in 2019 within the General Insurance and Investment Management sectors. The review identified significant shortcomings in some principal firms’ oversight and understanding of their regulatory responsibilities for their AR’s. A further review was inevitable since the AR regime was scrutinised by the Treasury Select Committee following the high political visibility of the Greensill Capital affair.

What will Principal Firms need to do?

Principal firms and AR’s will need to demonstrate appropriate oversight and control of their activities, their financial stability and that they ensure fair outcomes for consumers when selling products or giving advice. The FCA also stated as per their letter of 4 May 2021, that they intend to carry out further work at their gateway for authorisations to achieve this, as well as more targeted supervision to reduce the most significant risks from Principals and AR’s.  We already have seen a change in the usual time it takes to approve an AR which has been pushed from around 3 weeks to 12 weeks.

The FCA over the past few weeks have sent a data request to a number of principal firms requiring them to provide additional information on their AR’s. The survey exhibits a particular focus on the revenue streams and activities of AR firms, as well as the financial and structural relationships between Principal firms and their AR’s. Such information seeks to reveal the full scope of activity currently taking place under the AR regime and the degree of oversight provided by principal firms. The data collection will inform their policy development, support their supervisory work on AR’s and inform discussions with the Treasury on potential legislative changes that seek to mitigate future risk unearthed as a result of the Greensil Capital failure.

When will we know more?

During Q4 of this year, the FCA will consult further on changes to their rules governing this regime to improve and strengthen it. This will include changes to require more timely information on Principals and their AR’s and to “improve Principal’s ongoing oversight and due diligence” of current and prospective AR’s, a phrase also used by the FCA within their 2021/22 Business Plan report.

The FCA is also considering whether more fundamental changes are needed to the regime, including legislative change. The ambition will be to release a Policy Statement around Q2 2022, however, this will depend on the extend of questions the first consultation paper will raise in Q4 2021.

What are the likely consequences?

Small firms encountering the possibility of increased supervision from the FCA are likely to lack the resources to continue business and there may be a consolidation in the space. Notably, requirements for capacity and capital may prevent some Principals from carrying on as a business. Principal firms with more complex business models (especially in the retail space) are likely to be deterred from regulatory hosting if each AR attributes an increased risk and liability. Overall, it is very likely that there will be a reduction in principal firms offering hosting solutions.

The effects of the new regime changes are likely to impact one of the competitive advantages of ‘Global Britain’. Notwithstanding these unfortunate circumstances for the legitimate ARs operating today and their Principal, there is hope that this review will clean up parts of the industry where there are too few resources or controls, especially in the retail area which is most prone to hurt consumers.

Regulatory Hosting

Laven offers a UK regulatory hosting platform which provides clients with the opportunity to conduct regulated activities as an Appointed Representative (AR).


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