“…my understanding is that it [the appointed representative regime] was set up in 1986 for self-employed salespeople. It is now being used for regulatory hosting of companies like Greensill. That seems to me, again, to be quite a strange state of affairs. I would have thought that was worth a good look as well”
Sam Woods, Deputy Governor for Prudential Regulation at the Bank of England and Chief Executive Officer the Prudential Regulation Authority (“PRA”) (UK Parliament, 2021)
On 3rd December 2021 the Financial Conduct Authority (“FCA”) published consultation paper 21/34 on Improving the Appointed Representatives regime (“CP21/34”). CP21/34 is based on findings from recent interactions with firms that use appointed representatives (“ARs”), an analysis of secondary source data collected by the FCA, such as supervisory and complaints figures and the report entitled Lessons from Greensill Capital (UK Parliament, 2021).
What is a ‘regulatory hosting service’?
- Regulatory hosting is typically offered by compliance consultancies and similar service providers to new businesses that are seeking to establish themselves in the provision of financial services. In regulatory speak, the provider is known as the “principal”.
- In short, the new business becomes an AR to the principal, “pigging backing” certain of the latter’s permissions (in essence, the principal’s licence).
- The model has proved popular in the asset management space. Typically, an aspiring alternative investment fund manager would spend a period on a host’s ‘incubation platform’ until such time as it is able to become authorised.
- ‘Regulatory hosting’ is not currently defined in the FCA’s rules. The FCA is seeking input on how to define it as a part of the consultation.
Why is regulatory hosting popular?
- Regulatory hosting is popular because it is a quick and cost-effective way to help new businesses on to the market.
- The formalities to commence activities as an AR are currently much lighter than those for authorisation as a standalone business. For example, the FCA may take up to 12 months to decide on an incomplete application for authorisation, whereas most AR appointments can be notified to the FCA within 10 days after the AR has started engaging in activities.
How does a regulatory hosting service differ from a traditional AR model?
- Host principals are rarely involved in the performance of the regulated activities by the AR. Accordingly, a host principal’s main interest in its relationship with the AR is largely economic, i.e. receipt of fees for ‘sitting on’ the host’s platform and the possibility of a future consulting relationship if and when the AR decides to become independently authorised.
- By contrast, in traditional AR models, the principal has a direct interest in the AR’s business. For example, in broking situations the AR may be involved in referring prospective clients to the principal or may assist clients in their transactions with the principal.
What issues is the FCA trying to address?
- The FCA recognises the benefits of hosting in terms of facilitating innovation and encouraging competition. However, as regulatory hosting wasn’t envisaged by the current AR regime, the FCA is concerned that:
- some third country entities might be using regulatory hosting to provide financial services in the UK through a “back door” in preference to seeking authorisation. This denies the regulator the opportunity to scrutinise such entities’ business models in depth prior to their commencing activities;
- there is a risk that some entities turn to the AR model after being denied authorisation;
- some principals are supporting ARs that are disproportionately bigger than themselves. In such cases, the FCA is concerned that the principal may not have sufficient financial and technical resources to sustain the AR’s activities; and
- secondment arrangements, particularly in the asset management sector, may be creating conflicts of interest that principals are unable to effectively manage.
What options is the FCA considering to address these issues?
- Prohibition: Preventing firms acting as (prospective) principals from taking on ARs that are not involved in the provision of services like those the principal is itself involved in. For example, a sell side commodities broker may not be allowed to take on a prospective AR that wishes to become active in the asset management space.
- Size limitation: First, this could involve preventing firms from taking on ARs that are larger than themselves. Second, entities above a set threshold could be required to seek authorisation and would not be able to pursue the AR route.
- Range and scope of services limitation: This would entail restricting the number and types of activities a host could support. The objective here would be to prevent firms from becoming overstretched or accommodating ARs that they are not well placed to support from a technical perspective.
- Consent requirement: Here, the FCA could insist that a firm intending to commence hosting services obtain the FCA’s consent before doing so. Moreover, the FCA could also impose a consent requirement on firms seeking to appoint an AR where that firm is smaller in size than the prospective AR.
- Regular review requirement: This could mandate that a principal keeps its relationship with the AR under regular review, particularly to account for changes in the size and scale of business that the AR is undertaking.
Our firm already offers hosting solutions, should we be concerned?
- The FCA has stated that it would seek to minimise the impact on existing hosting relationships, for example by setting a longer lead in period for any changes to take effect.
What are the next steps?
- The FCA is currently seeking responses to its consultation. The FCA expects to be in a position to publish final rules in H1 2022.
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Originally published by Thomson Reuters © Thomson Reuters.
- CP21/34: Improving the Appointed Representatives regime, Financial Conduct Authority, December, available at: https://www.fca.org.uk/publication/consultation/cp21-34.pdf (last accessed 6th December 2021).
- Treasury Committee reports on ‘Lessons on Greensill Capital’, UK Parliament, 20th July 2021, available at: https://committees.parliament.uk/committee/158/treasury-committee/news/156684/treasury-committee-reports-on-lessons-from-greensill-capital/ (last accessed 6th December 2021).