To AR or NOT to AR, that is the Question…

By Simon Hill | Agent Relationship, Appointed Agent, Appointed Representative, Compliance, Insurance, Insurance Broker, Investment, Investment Advisor, Investment Manager, Regulatory Hosting, Umbrella Services | 0 Comments

As the new year draws ever closer, and the FCA prepares to usher in the new era of the Investment Firms Prudential Regime (IFPR) – which brings with it increased capital requirements and a more onerous approach to risk management – start-up firms with ambitions of carrying on regulated activities may already be re-thinking the most effective route to market.

For start-up firms, consideration of the merits of becoming an Appointed Representative (AR) to an already authorised ‘Principal Firm’ is certainly a worthwhile exercise. To clarify, it’s not that I envision the IFPR being a significant new driver for firms to chase AR status instead of their own authorisation, but rather it’s another reason for them to at least consider it.

As such, I want to break down exactly what an Appointed Representative relationship should look like, and detail the advantages and disadvantages directors of firms should expect if this is the desired route.

The Good Stuff

First of all, for firms who have deadlines or commercial targets to hit, the process to be onboarded as an AR of a Principal Firm is much shorter than an application for direct authorisation. In my experience, I have seen some of these applications take only a matter of a week or two until the AR is included on the Financial Services Register – making the firm free to go about their business knowing they have the regulatory cover of their Principal Firm. At the other end of the spectrum, the longest I have seen an application of this nature take is between 2-3 months. This is a far cry away from the FCA’s statutory deadline of making a decision on authorisations taking up to 12 months.

Not only this, but many firms see AR status as a ‘try-out’ before making the plunge into becoming authorised in their own right. One of the key aspects of an AR relationship is that the Principal Firm is responsible for the AR’s conduct from a regulatory perspective. This means that it is very much in the interest of the Principal Firm to ensure the AR is acting accordingly. This allows the AR to dip its proverbial toe into regulated waters, gaining invaluable experience as they do.

Very much linked to the point I made above; a firm who has AR status with a Principal Firm, more often than not will be able to draw on the experience and expertise of the regulated firm. Many Principal Firms who have an AR model (that is, they actively seek to appoint ARs) offer extensive business support to ensure compliance with the requirements as well as adding value to the relationship for the AR.

The ‘Less-good’ Stuff

Of course, gaining Appointed Representative status is not without its drawbacks. Not least of all is the potential ongoing costs. Unfortunately, Principal Firms do not allow other firms to ‘piggyback’ off their licence out of the goodness of their hearts. There will undoubtedly be a fee involved, whether that be a monthly or annual fee, or even in the form of percentage of profits. The money to be saved by not undertaking a full authorisation application can appeal in the short term, but the ongoing AR fees which firms must pay can grow frustrating.

The flip side to having the regulatory cover of the Principal Firm is not being able to enjoy full autonomy of your firm’s activities. Principal Firms, depending on their risk appetite, will exercise varying degrees of governance and oversight pursuant to their own regulatory obligations. Firms hoping to become an AR before their authorisation must accept the fact that certain activities will require ‘principal sign off’ such as distributing financial promotions. As well as this, there is also very likely to be reporting requirements written into the contract to enable the principal firm to keep track of the AR’s activities.

It is also very likely that the Principal Firm will want to see various policies and documentation during the onboarding process. Some of this information may be sensitive, which the directors of some firms may not be entirely comfortable with. However, this is a necessity from the Principal Firm’s perspective as the requirements in the FCA Handbook prescribe such checks – a major one being that the Principal Firm should satisfy itself that the AR is solvent, meaning the AR must be prepared to open its books to the principal.

What Documentation would typically be required?

The due diligence process can vary between Principal Firms with many factors playing a part: risk appetite, resources, competency to name a few. Below is a list of some of the documentation I see most frequently, but this is not an exhaustive list!

  • Audited accounts for last 3 years
  • Business Plan
  • Data Protection Policy
  • IT systems architecture
  • IT Security policy
  • AML policy and risk assessment
  • Complaints handling procedures
  • Business Continuity Plan
  • Information on the suitability and experience of the management body

Some of these will be a given, like the Business Plan. This, of course is an invaluable document when the Principal Firm is trying to ascertain the firm’s proposition and ensure it falls within its own regulatory parameters.

In any case, it is important that firms hoping to become an Appointed Representative can produce the requisite policies that are fit for purpose. This is where the help of expert advice and assistance is vital. The team at FinTech Compliance have a wealth of experience in this area and can certainly assist. On the other hand, we also have a great deal of experience in assisting Principal Firms with the onboarding process as well as the continued oversight, ensuring Principal Firms are complying with their regulatory requirements.

To AR or NOT to AR, that is the Question… Written by

Simon Hill

Lead Consultant

Simon affected a change in his career path achieving his ambition to work with innovative start-up firms in the financial sector. Exceeding our expectations Simon has become an integral part of the FinTech Compliance Team working with clients from across the financial services spectrum while developing a particular expertise in payment services & open banking.

If you have questions about becoming an AR or need assistance, we are here to answer your question or assist with your application.

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