Often viewed as an administratively straightforward and "light-touch" alternative to full FCA authorisation (or a bridge towards it), both principal firms and Appointed Representatives will soon need to contend with new rules intended to bring enhanced transparency and oversight.
On 3 August, the FCA published new rules on enhancements to its Appointed Representative (AR) regime, which look to "train the minds" of principal firms towards ensuring adequate supervision of their ARs.
In terms of a few key changes:
- Pre-notification: Principal firms will need to notify the FCA 30 days before a proposed AR starts to carry on regulated activities. Though still much quicker than obtaining authorisation, this will nevertheless be a change from current practice which permits ARs to be appointed very quickly indeed.
- More reporting to the FCA: Among other things, principals will need to tell the FCA why they intend to appoint an AR, what regulated activities the AR will undertake, whether the AR is part of a group, and whether any individuals from the AR will be seconded to the principal to carry on portfolio management or dealing activities (a popular model in the fund management sector). Later this year existing principals should expect to receive a formal section 165 request for the FCA to get this information about their existing ARs (with 60 days to respond). Principals will also have to tell the FCA about complaints and provide AR revenue data.
- Clarifications about oversight: A running theme is that the FCA wants to see principals doing more to oversee their ARs. There is extra guidance on what factors principal firms should consider before appointing an AR to determine that they have adequate resources to supervise. The FCA even asks principals to consider whether they will be able to maintain a level of oversight equal to that which it would exercise over their own employees.
- Annual reviews of ARs, including fitness and propriety: Principals will be required to review their ARs annually. They will need to satisfy themselves that each AR is solvent and suitable to be an AR. It will also need to assess the fitness and propriety not only of senior individuals at the AR (e.g. directors and other senior management), but also of the AR's controllers (i.e. parent companies).
- Annual self-assessment for principals: Principals will also be obliged to reflect on their own approach annually, by undertaking a self-assessment focusing on whether it is effectively supervising its ARs, which must be signed off by the board. The annual AR reviews should feed into this to identify any emerging risks. Interestingly, the FCA says it expects this document to be "a powerful supervisory tool", perhaps putting principals on notice to expect requests to see copies in due course...
Most of the new rules start to apply from 8 December 2022, giving only 4 months to get ready (though existing principals will have until 30 November 2023 for their first annual reviews of ARs and annual self-assessments).
Overall these new rules will require principals to do more in terms of overseeing their ARs, perhaps by further formalising existing practices. Clearly this carries a risk of increased costs being passed on to ARs, though this risk left the FCA unmoved. With HM Treasury also considering further changes to the AR regime (e.g. applying the SM&CR or changing the activities covered), there could also be further changes for principals and ARs to think about before too long.
While the regime has benefits, we have identified a wide range of harm across all the sectors where principals and ARs operate. Where harm occurs, it is often because principals do not undertake adequate due diligence before appointing an AR, and/or due to poor on-going control and oversight.