Key Summary on the CP21/34 released by the FCA
On the 3rd of December 2021, the FCA released its Consultation Paper 21/34 on the appointed representative regime. In their consultation, the FCA are proposing changes to the Appointed Representatives (AR) regime to reduce potential harm to consumers and markets. In view of the consultation paper, the harm often occurs because principals do not undertake adequate due diligence before appointing an AR and do from poor ongoing control and oversight after an AR has been appointed.
In doing so, the vision the FCA seems to take in this CP21/34 is that a reduction in numbers of ARs will be positive: “As much of our proposals clarify or enhance existing requirements (…) we consider the number of principals and ARs should remain relatively stable, with an approximate potential for around 10% of them leaving the market”.
Through analysis of the FCA’s existing data on principals, on average principals generate 50 to 400% more complaints and supervisory cases than non-principals across all sectors where this model operates. It’s important to note that the largest disparity occurs in retail lending and retail managing activity. Whilst Wholesale Financial Markets and Investment Management have the highest rates of complaints overall, the ratio between non-principal firms and principal (hosting) firms is not as large. Advisors and arrangers also have the least number of complaints per £1m revenue. The FCA hence believes there is significant evidence of harm across the whole sector which now requires regulatory intervention.
The FCA’s proposed changes to the regime aim to address the harm arising in this market while retaining the cost, competition and innovation benefits the AR model can provide. The proposals would improve principals’ oversight of ARs and require principals to provide the FCA with more information on their ARs which would allow the FCA to spot risks more quickly. The FCA would also expect Ars to be more effectively overseen by their principals.
The main areas of changes are the following and apply to all sectors where ARs operate:
1. Additional information on ARs and notification requirements for principals. This will allow the FCA to more easily identify potential risks within principals and ARs. It will also help the FCA better assess whether the principal has the expertise, systems and controls to effectively oversee its ARs and to target our supervisory interventions more effectively
2. Clarifying and strengthening the responsibilities and expectations of principals in the FCA rules and providing additional guidance for principals on their responsibilities, and our expectations of how they should act and oversee their ARs.
3. The FCA is also taking this opportunity to simplify the structure of SUP 12 where possible.
4. The FCA is also looking into the risk from regulatory hosting arrangements and business models where ARs are large in size relative to the principal. We also want views on whether we should introduce or strengthen prudential standards to reflect the harm posed to consumers and markets by firms with business models that include ARs. Safeguards may include setting limits on AR arrangements.
1.Proposed changes
The information which principals are currently required to report to the FCA on their ARs is limited. It includes the AR’s name and contact details, its legal status, date of the appointment, whether it is an IAR, and the general financial market in which the AR operates. Whilst the understanding that principal firms are fully responsible for the regulated activities of the ARs and likewise of the fitness and propriety of both the entity and individuals, the proposals aim to create more transparency during the application process so that the FCA has a full understanding of the ARs business.
The proposals will ask for principals to provide the FCA with more information on their ARs and the business these ARs conduct. This will include:
· rort to FCA, for inclusion on the Financial Services Register (Register), specific information on the activities the ARs are permitted to undertake;
· report to the FCA, for its own review the ARs business, revenue, complaints and regulated vs. non-regulated activities; and
· notify FCA of an intention to begin providing regulatory hosting services before beginning to do so.
Many of the proposed changes will apply to introducer appointed representatives (IARs) preliminarily, however the reporting subsides in some areas for IARs.
(i) Preliminary/onboarding Information
Changes that the FCA envisages implementing to the “Add an AR or tied-agent form” to understand the AR’s Business:
1. The primary reason for the principal’s intention to appoint the AR
2. The nature of the regulated activities the principal will permit the AR to undertake (primary and secondary markets in which the AR will undertake regulated activity)
3. Non-regulated business of the AR. This includes:
i. The nature of the non-regulated business (financial services products or services, non-financial products and services).
ii. The proportion of the non-regulated activities compared to the regulated activities in the first year following the appointment.
4. Whether the AR will provide services to retail clients
5. Whether the AR was previously an AR of a different principal, and if so, why the AR is now intending to operate under a new principal
6. Whether the AR is part of a group. If so, provide the name of the parent undertaking.
i. Activities of a wider group the AR is part of can affect the activities of the AR and the potential risk from it. Requiring firms to provide us with this information will allow us to monitor this more effectively
7. Whether any individuals from the AR will be seconded or contracted to the principal firm to carry on portfolio management and / or dealing activities, and if so, explain the rationale for entering into such an arrangement.
8. Information about the nature of the financial arrangements between the principal and the AR. For example, whether the AR pays or will pay the principal commission, any flat fees, or any additional payments. This would give us a better understanding of the financial relationship between the AR and the principal, better allow us to identify potential outliers and enable us to investigate further where needed.
9. Anticipated revenue from regulated and non-regulated activity during the first year of appointment. For new ARs:
i. where the data is available, we would require the principal to provide actual figures (for example, for non-regulated business, or if regulated business was conducted under a different principal).
ii. If the data is not available (new AR entity with no revenues yet), provide a projection of the annual income of the AR (both regulated and non-regulated) at the point of appointment.
The FCA also proposes to require principals to provide less information on IAR appointments compared to AR appointments. It proposes to require the following information for each IAR appointment:
a) The nature of the regulated activities the principal will permit the IAR to undertake;
b) Information about the nature of the financial arrangements between the principal and the IAR (as detailed above); and
c) Revenue from regulated activity (but not from non-regulated activity) during the first year of appointment.
The FCA proposes to require notification of these additional items of information in respect of existing ARs as well as those appointed after the proposed rules come into force.
In establishing this process so, the FCA says “it will (…) enable us to consider how the principal has established that the proposed AR is solvent and otherwise suitable to act as an AR, before the AR begins to carry out regulated activities.” So perhaps we can expect some follow-up when submitting the “Add AR” forms.
Reporting timeframes:
The FCA proposes to require that a principal notifies the FCA of a proposed AR appointment at least 60 calendar days before the appointment takes effect.
(i) Ongoing suggested changes to reporting:
Implement annual attestation to confirm details of ARs an annual basis (as done for FCA firms at present) within 60 business days of their accounting reference date.
1. Include details on the AR activities the principal takes responsibility for on the FS Register.
2. Submit complaints data on AR’s (not just on the principal). New form (SUP 12 Annex 6R) will be provided.
3. Principals to provide revenue information on ARs from both regulated and non-regulated activities. To be provided per AR rather than in bulk. This will help see the size of the AR.
a. Non-regulated activities revenue to be split between revenue from non-regulated financial activity and non-financial activity.
b. No revenue data needed on non-regulated activities of IARs.
c. For existing ARs, principals provide information annually based on their Accounting Reference Date (ARD), with 30 working days in which to submit the return. Reporting via new AR reporting form (SUP 12 Annex 6R). Transitional period for existing ARs has been proposed, so that principals provide this information for the first full year of data following the rules coming into effect.
d. For new ARs (already specified in i. Onboarding info):
i. Where the data is available, we would require the principal to provide actual figures (for example, for non-regulated business, or if regulated business was conducted under a different principal).
ii. If the data is not available (new AR entity with no revenues yet), provide a projection of the annual income of the AR (both regulated and non-regulated) at the point of appointment.
Reporting timeframes:
Changes to take effect for existing ARs up to 60 calendar days after the rules come into force.
(i) Additional changes/enhanced guidance from the FCA:
– Fitness and propriety reviews: Principals should be overseeing the fitness and propriety of the individuals in the ARs. In doing so, principals to be actively assessing and recording at least annually whether and how individuals at ARs meet fit and proper expectations on a continuing basis.
– Assessing competence and capability: In doing so, the FCA wants to provide further guidance as to what is expected when assessing the key personnel at the principal AND the personnel in the AR:
o are individuals appropriately experienced and trained to be responsible for the activities and business they carry on behalf of the principal?
o Do the individuals have the necessary time to perform the tasks and/or functions for which they are responsible?
o Do the individuals have the requisite knowledge and skills to undertake the tasks and/or functions for which they are responsible?
– Delegation: Any delegation on risk management, compliance, to be appropriately monitored an conflicts identified.
– The term “reasonable” is going to be better defined and practical steps will be proposed in SUP 12.4.4GG as to what the FCA sees as reasonable steps firms should follow in monitoring ARs and avoiding risk of harm:
– Resource control: Firms to ensure they are resourced with sufficient staff, knowledgeable staff and systems to support the business of ARs, amount of ARs and size of each AR respectively.
– Triggers that require review of monitoring arrangements:
o The size/volume of the AR’s regulated business increases significantly in a short period of time
o the senior management turnover at the AR is unusually high
o staff turnover at the AR, across all staff members involved in carrying on regulated activities for which the principal is ultimately responsible, is unusually high
– In helping firms identify potential instances/risk of harm, the FCA proposes to include at SUP 12.4.4CG accompanying guidance on the considerations principals should have to identify an undue risk of harm.
– FCA will also add clarity on situations when ARs become unmanageable to oversee and principals should sever relationships with the AR. More attention to be given to terminations, especially on removal of status as AR from website and helping the AR in winding down their regulated activities effectively. A list of circumstances where the principal must consider termination (or remediation) are listed in 12.6.1-A G.
– Principals to annually prepare a self-assessment document demonstrating their compliance with aspects of the policy and methodologies used to complete the assessment. This MAY be requested by the FCA.
2.Hosting Platforms
Existing principal firms may be asked to notify FCA if they provide regulatory hosting services. This is already being done via the AR Survey.
The ratio of wealth and personnel between principal and AR is also a large consideration. Principal’s with small teams may not be able to spend enough time and resources monitoring large and complex ARs. A principal may also not have the financial resources to deal with the failure of a materially larger AR or pay appropriate redress to consumers.
Overseas ARs are causing worries on circumventing Part 4A applications following the end of the TPR. Extra-territorial element to these arrangements could add an additional level of complexity.
FCA wants to define regulatory hosting in the handbook and bring forward policies specific to regulatory hosts. AR Survey data will be used to address any risks of harm.
Potential policy options suggested by the FCA:
– prohibit the engagement of ARs which operate businesses which are materially distinct from that of the principal
– limit the maximum size of ARs before requiring them to become fully authorised in their own right
– require our specific consent to provide regulatory hosting services or to have larger ARs than the principal
– limit the range or scope of regulated activities that regulatory hosts can oversee and / or the number of ARs they can have
– require principals that provide these services to meet additional requirements to those that apply to other principals
– requiring firms that want to provide regulatory hosting services to notify us of this intention before beginning to provide these services [ALREADY SPECIFIED IN THE CP].
– require principals to regularly review the relative size/scale of business carried on by their ARs and consider whether it remains appropriate
Further steps:
The FCA will review feedback to the consultation and expect to publish a follow-up Policy Statement (PS) and final rules in H1 2022.
Laven and Regulatory Hosting
Laven has a long-standing expertise in the monitoring of ARs. If you require assistance as a principal firm in adapting to the prospective changes, reach out to us. Laven’s regulatory software has been designed to save 40% of time on the time spent by staff members monitoring duties.
