The FCA sets out its required improvements to the AR regime

August 24, 2022

Implications for the AR Model

Appointed Representatives are not regulated by the FCA, so it is Principal firms’ responsibility to ensure that their ARs comply with the rules.  The FCA has said that, whilst some Principal firms do this effectively, many do not have adequate oversight of their ARs.  To combat this potential customer detriment the FCA set out proposed new rules in its Consultation Paper CP 21/34 which would put more responsibility upon Principal firms.  The FCA has now published its Policy Statement PS 22/11 Improvements to the Appointed Representatives regime.  The devil, again, will be in the detail but this is likely to prove a significant challenge for some Principal firms, and those firms should perhaps be considering the risks versus the rewards and the costs versus the benefits of having ARs and IARs.  It is an increasing area of focus by the FCA with a newly formed dedicated department within the FCA’s Supervision teams.

In the press release that accompanied the Policy Statement the FCA stated their belief that:

• whilst ARs can bring innovation and choice, Principals and ARs account for more than 60% of the total value of recent claims to the Financial Services Compensation Scheme (FSCS) and they generate up to 400% more supervisory cases and complaints than other directly authorised firms; and
• the changes the FCA is making will help ensure that Principals manage their ARs better – ensuring that they provide the oversight needed to avoid consumers being mis-sold or misled; they will also need to provide the FCA with better data and information to support the FCA’s work.

In general, the Policy Statement follows the related Consultation Paper requiring more information to be submitted to the FCA by Principals on their ARs and IARs – such as regulated revenue and complaints data – and for Principals to have greater oversight of their ARs and IARs.

There have been some concessions from the FCA – for example being less concerned about the non-regulated non-financial activities of ARs, giving slightly longer timeframes (60 days after a Principal firm’s Accounting Reference Date instead of 30 days to file reports) and being less prescriptive on the annual review of ARs and the self-assessment required by the Principal firm.  The self-assessment needs to be signed off by the Principal firm’s governing body. The annual review of an AR should also consider the fitness and propriety of senior individuals at the AR and the AR’s financial position.

The FCA seems to have departed from its coordination with HM Treasury in publishing its Policy Statement.  They were working together, with the Treasury running a Call for Evidence on the AR regime alongside the Consultation which the Treasury is still working on, and which will be published in due course.  This Treasury Consultation is considering, amongst other things, the question of whether SM&CR should be rolled out to ARs; the FCA, therefore, has not addressed this in the Policy Statement.  Also, the FCA has not addressed the wider discussion points which were in its Consultation, such as concerning Regulatory Hosts and whether there should be restrictions where, for example, the AR is bigger than the Principal or where Principals have overseas ARs. The FCA will publish a response to feedback on these issues in 2023.

There is still much for Principal firms to do alongside the product governance work and the Consumer Duty, with the FCA confirming that, unsurprisingly, these apply to ARs as well.

Under the new rules Principal firms will need to:

• apply enhanced oversight to their ARs, including ensuring they have adequate systems, controls and resources;
• assess and monitor the risk that their ARs pose to consumers and markets, providing similar oversight as they would to their own business;
• review information on their ARs’ activities, business and senior management annually, and be clear on the circumstances when they should terminate an AR relationship;
• prepare a self‑assessment document (a single document designed to identify any risks and gaps in compliance with the firm’s obligations as a Principal) at least once a year, covering how they meet the requirements of the policy;
• ensure that these annual reviews (which can be conducted by responsible individuals with a suitable degree of knowledge and authority below the governing body’s level, with an appropriate line of escalation to the governing body of any significant issues identified at specific ARs) are completed thoroughly.  Firms can meet these requirements by integrating them into existing internal reporting processes, providing they continue to meet the standards set out in the rules and guidance;
• notify the FCA of future AR appointments 30 calendar days before they take effect, reducing the notification period from the previously suggested (in the Consultation Paper) 60 days;
• provide complaints and revenue information for each AR to the FCA on an annual basis. Firms will have 60 days to complete this and the FCA are introducing revenue bands for annually reporting AR revenue from non-financial non-regulated activities.
• notify the FCA whether they are conducting ‘Regulatory Hosting’, although there are no further rules or requirements yet in relation to Regulatory Hosts.

As part of the enhanced reporting requirements Principal firms should expect to receive a Section 165 data request from the FCA later in the year. Section 165 requests are, in effect, requests from the FCA for information which must be responded to, providing the requested information.  Principals will have 60 days to respond to the request when they receive it.

For more information, click here.  Firms with Appointed Representatives who wish support to meet the enhanced requirements should get in touch now and book in some time with our experienced Consultants.

*Article written by John King and Alastair Haughton. John King is a former manager at the FCA, with 16 years of experience of working in insurance supervision and with enforcement.  John works with ICS.  Alastair Haughton is our Technical Resources Consultant who has worked with us for ten years.  John and Alastair have provided their combined insights about the FCA’s new rules to improve the oversight of Appointed Representatives (ARs) and Introducer Appointed Representatives (IARs).

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