According to the Financial Conduct Authority’s annual report, more than 300 AR notifications have been withdrawn during 2021/2.
Changes to its processes now require principal firms to submit the approved persons forms at the same time as the AR notification. This has empowered the FCA to focus on principal firms and ARs that pose the most harm.
The FCA previously stated they are seeing a wide range of detriment across all sectors where firms have ARs. This harm often occurs because principals do not perform enough due diligence before appointing an AR, or from inadequate oversight and control after an AR has been appointed.
The regulator’s reform across the sector will see AR notifications having to take place at least 60 days prior to the arrangement coming into effect.
Businesses will have to disclose why the principal is entering into an AR relationship and what regulated activity will be undertaken.
The AR regime was initially created to allow self-employed representatives to carry out regulated activities without having to be authorised. However, over time, it has morphed into an industry of its own across all sectors and markets.
Data from the FCA shows principals cause 50 to 400% more supervisory cases than non-principals. It also notes that cases are higher than for non-principals across every sector.
Principal firms are ultimately responsible for ensuring their ARs comply with the FCA rules, but the regulator has found many principals simply do not oversee the activities of their ARs to an appropriate and effective standard.
Firms with or which plan to have ARs in the future need to act now
The FCA requires principals provide more detailed information in a timely manner. The new data demands are designed to help identify potential harm and compel principals to own the responsibilities and expectations placed on them.
Any principal or firm looking to enter the AR arena needs to be confident their systems and controls are sufficiently robust to meet the new demands.
Principals with under resourced compliance departments should look to established hosting platforms to manage the onboarding and ongoing supervision of their ARs. For a potential AR, the choice of principal should be decided after a thorough review of the host’s experience, competence and resources allocated to being in the regulatory hosting space.
Enhanced supervision and ongoing verification – the new normal
As well as expecting principals to conduct more effective supervision, there is a new requirement to run yearly verification checks on ARs following the FCA discovery of a “wide range of harm across all sectors”.
Intensified Scrutiny
The FCA announced in the spring the launch of its new dedicated AR department and has vowed to intensify their scrutiny of principal firms and their proposed ARs.
In a recent pilot of this new and stronger approach, around 80 per cent of principals looking to appoint ARs have either seen their applications refused or voluntarily withdrawn.
