Good Principals Have Good Principles: a look at the FCA’s review of the Authorised Representative Regime

By Kyte Ekstrom | Agent Relationship, Appointed Agent, Appointed Representative, Appointed Representatives Regime, Principal Firms, Regulatory Hosting, Umbrella Services | 0 Comments

On 3 December last year, the FCA launched a consultation on improving the appointed representatives (AR) regime. The proposed changes seek to place greater compliance responsibilities on firms involved in the regime. I’ll be exploring some of the reasons behind the review and the recommendations made by the regulator.

What is the AR regime?

The AR regime permits businesses to undertake some regulated activities without the need for authorisation. This is allowed on the basis that the unauthorised business (the AR) is overseen by an authorised firm (the principal) who holds permissions to undertake the regulated activities that the AR is seeking to carry on.

The regime was first introduced in 1986 for investment services and was later expanded to cover a wider range of financial services. From these humble beginnings, the AR regime has grown to encompass roughly 40,000 ARs all operating under around 3,600 principal firms. That comes to a mean average of just over 11 ARs per principal firm. But, in reality the load is not evenly spread, with some principals having hundreds or even thousands of ARs while the majority oversee only one.

In their consultation paper, the FCA acknowledged that the AR regime has a range of potential benefits. One such benefit is cost effectiveness; the regime can provide a cost-effective way to comply with regulation which can prevent some costs being passed onto consumers. Additionally, the FCA highlighted that the regime can support competition and innovation by allowing different types of firms to operate and giving them the space to trial new services. Finally, the FCA noted that well-run principal firms who properly monitor and oversee their ARs can provide good outcomes for consumers and markets.

So, what’s the problem?

Despite the positives mentioned above, the FCA has identified numerous negative practices which they believe are driven by poor oversight and controls as well as a lack of clarity around the responsibilities of principals. These negative practices include ARs providing misleading or confusing information to consumers, consumers being targeted with products and services that are not fit for purpose or appropriate, and ARs acting outside the scope of their appointment (i.e. undertaking activities that are not covered by the principal’s permissions).

The FCA’s concerns are supported by the statistics. FCA data shows that on average, principals generate 50 to 400% more complaints and supervisory cases than firms that are not principals. This is the case across every sector in which the AR regime operates. In addition to this, between 2018 and 2019, principals and ARs accounted for 61% of the value of Financial Services Compensation Scheme claims. This rose to a whopping 83% for principals and ARs in the Home Finance sector during the same period.

What’s to come?

The FCA’s consultation has now closed, at the time of writing they have not yet provided feedback on responses. However, we can glean a broad understanding of what’s coming down the tracks from the initial consultation.

One area of focus raised in the consultation is to increase the scope and depth of the information that principals are required to report to the FCA about their ARs. This includes such details as the reason for appointing the AR and the nature of regulated (and non-regulated) activities of the AR. Additionally the FCA may ask firms to disclose information about the financial arrangements between the AR and the principal as well asking firms to explain the rationale behind seconding employees from the AR to the principal.

In addition to this, the FCA is keen to clarify the responsibilities of principals with respect to the ARs as well as tightening up the existing oversight requirements. One example of this is that where principals are already required to consider the fitness and propriety of their prospective ARs, the proposed changes would require principals to review this assessment on an annual basis.

For their part, the FCA seems to be focusing additional resources of their own to try and reduce the potential harm posed by ARs and their principals. This will take the form of a dedicated AR unit announced in May of this year. The unit will take on cases that present a risk of harm as well taking a lead in developing the FCA’s future AR strategy.

How we can help

Here at FinTech Compliance we have experience helping firms on both sides of the AR/principal relationship. This includes assisting principals in onboarding new firms and managing the oversight of their ARs as well as helping unauthorised firms prepare for becoming an AR. In addition to this we can assist existing ARs that are looking to make the jump to full authorisation.

If you’re interested in finding out more about our services, get in touch today!

Good Principals have good Principles

written by

Toby Hiscock

Associate Compliance Consultant

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