UK regulator aims to tighten requirements on oversight of appointed representatives
The UK Financial Conduct Authority (FCA) has today launched a consultation on improving the appointed representatives regime and tackling harm from this model.
An appointed representative (AR) is a firm or person who carries on a regulated activity on behalf, and under the responsibility of, a firm authorised by the FCA (the principal). In appointing an AR, the principal assumes responsibility for the regulated activities the AR carries out.
While the AR regime has benefits, including encouraging effective competition and providing market access, we are taking action to mitigate the risk of harms arising. Through analysis of 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. This shows that there are more issues arising from principals and ARs than from other directly authorised firms.
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, allowing the FCA to spot risks more quickly.
In particular, the regulator proposes to require principals to provide it with the following new items of information for each of their ARs:
- The primary reason for the principal’s intention to appoint the AR
- 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)
- Non-regulated business of the AR. This includes:
– The nature of the non-regulated business (financial services products or services, non-financial products and services)
– The proportion of the non-regulated activities compared to the regulated activities in the first year following the appointment
- Whether the AR will provide services to retail clients
- 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
- Whether the AR is part of a group. If so, provide the name of the parent undertaking. 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 the FCA with this information will allow the regulator to monitor this more effectively
- 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
- 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 the FCA a better understanding of the financial relationship between the AR and the principal, better allow it to identify potential outliers and enable it to investigate further where needed.
- Anticipated revenue from regulated and non-regulated activity during the first year of appointment.
Sheldon Mills, Executive Director for Consumers and Competition at the FCA, said:
‘The appointed representative model helps bring choices to consumers, but the level of harm we are currently seeing is too high. There are real risks of consumers being misled and mis-sold with little scope for recourse.
‘We have already started work looking at high risk ARs and these proposals build on that work. We want to ensure that principals are properly overseeing their appointed representatives, ensuring they are competent, financially stable and delivering fair outcomes for consumers.’
Comments on this Consultation Paper (CP) are accepted by 3 March 2022.