On 28th September 2023 the Financial Conduct Authority (“FCA”) published its latest insights into the workings of the UK’s appointed representative regime ( the “AR regime”). Referring to data harvested from supervisory efforts conducted in 2021 and 2022, the FCA provided feedback on good and poor practice that it had observed and restated its enhanced expectations of principals. If your firm acts as a principal to ARs on introducer ARs (“IAR”) then read on…

My firm acts as a principal. What are the chances that we are “on the radar”?

Pretty high. In its update, the FCA revealed that there are currently circa:

  • 2,900 principals; and
  • 35,000 ARs, of which 14,000 are IARs.

At first glance, it would appear that the supervision of the AR regime is a herculean task for the regulator. One might think that it would be possible for a principal to “fly under the radar” in such an apparently congested space. Not so fast…

First, in recognition of the challenge that it faces, the FCA has established a specialist department to supervise the AR regime. This department works closely with the FCA’s authorisation teams to identify riskier AR setups that require closer supervision. The FCA is using a wide range of data as part of this effort, including, but not limited to:

  • information about complaints;
  • evidence of rapid expansions, i.e. the addition of large numbers of ARs or IARs over a short period of time; and
  • revenue data, to identify evidence that an AR is potentially bigger than its principal.

Second, the FCA stressed that 81% of principals “have a relatively small network size”:

  • 51% have one AR;
  • 30% have between two and four ARs;
  • 15% have between 5 and 50 ARs; and
  • only 4% have over 50 ARs.

Large AR networks are the “exception and not the rule”. Accordingly, it does not necessarily follow that just because a principal has engaged only a few ARs that they will not attract attention from regulators.

But my firm only engages IARs, surely that puts us in the lower risk bracket, right?

IARs are certainly perceived to pose a lower risk by the regulator with one proviso – they need to “stay on the ranch”. By law, IARs are extremely limited in what they can do. They can only:

  • effect introductions; and
  • distribute non-real time financial promotions.

In the update published in September, the FCA stated that it had become concerned that many IARs were potentially committing an offence by acting outside these restrictions. For this reason, it is essential that a principal ensures its IARs understand the differences between a full AR and IAR. Furthermore, the FCA stressed that even full:

“ARs are generally limited to engaging in regulated activities involving the distribution of, and advice on, financial services products. They can’t generally carry on the regulated activities involved in delivering those products or services…(such as managing investments and dealing in investments as agent).”

Given that principals retain ultimate responsibility for ensuring that their ARs are acting within these limits, it is crucial that principals are able to demonstrate that they have taken reasonable steps to ensure that their ARs and IARs are competent as part of wider fit and proper checks.

What are the potential consequences of failing to meet the FCA’s expectations?

In its update, the FCA said that it had intervened on multiple occasions where it had identified evidence of principals operating weak systems and controls to oversee the activities of their AR. In particular, the FCA said that it taken action where it had identified:

  • inadequate initial and ongoing due diligence on ARs and IARs;
  • weak monitoring of ARs’ and IARs’ activities, particularly to ensure that they do not act beyond the scope of their permitted activities;
  • insufficient resourcing of control functions, inhibiting their ability to monitor a firm’s ARs and IARs;
  • misleading marketing materials, e.g. where an AR claims that can provide services that it is not lawfully allowed to offer; and
  • insufficient professional indemnity insurance cover.

The type(s) of action that the FCA took include:

  • informal intervention;
  • agreeing the imposition of requirements on principal firms, e.g. voluntary requirements (“VREQ”);
  • challenging or rejecting applications to register new ARs; and
  • insisting that ARs remove misleading content from their websites, e.g. as to what services they are able to provide.

In some instances, firms had to terminate all their AR relationships and/or cease onboarding any new ARs. 1,300 AR relationships had been terminated as a result of regulatory intervention between 1st July 2022 and 31st August 2023. The FCA stated that, in one case, this rendered a firm’s business model unviable so it ceased trading.

How can C&G and CTP help you meet the FCA’s expectations

The first step in implementing a robust compliance framework is to ensure key persons within a business attain a sufficient level of understanding of their firm’s (as well as their own) regulatory obligations.  Achieving a well-rounded understanding involves obtaining answers to the following questions:

  • what do we need to do?
  • why do we need to do it?
  • what could happen if we don’t do it?
  • who needs to do what?
  • when do we need to do it?
  • how could we do it?

Working in partnership with Corporate Training Partnerships Ltd (“CTP”), C&G is running two training courses in 2024 to help principals and their appointed representatives better understand their obligations under the AR regime.

 

Course title First running date
Understanding the appointed representative regime (for appointed representatives) Thursday 25th January 2024
Understanding the appointed representative regime (for principals) Wednesday 28th February 2024

 

The first option is an ideal for principal firms looking for their current or prospective ARs or IARs to demonstrate a sufficient level of competence to attain or maintain registration.

For further information, including a course outline, prices and to book, please click on the links in the table above.

Discount for existing clients of C&G

If your firm currently has a master services agreement with C&G then CTP is offering a 25% discount off the advertised course fees. To take advantage of this offer, please speak to your usual account manager at C&G to obtain the discount code.

References

  1. Improving the Appointed Representatives regime through greater use of data. Financial Conduct Authority, available at: https://www.fca.org.uk/data/improving-appointed-representatives-regime-through-greater-use-data (last accessed 23rd October 2023).