April 3, 2023
The FCA’s new Rules for all Principal firms came into force on 8th December 2022. The FCA clarified and strengthened the responsibilities and expectations of Principal firms, and one of the FCA’s organisational commitments is improving Principals’ oversight of Appointed Representatives (ARs).
As part of the Consultation process for the new AR regime, the FCA indicated that it would consider potential areas for further change, over and above those to be addressed in the Policy Statement and covered by the new regime. One of those areas involved the process of Regulatory Hosting, which is a business model where, rather than carrying on any substantive element of a regulated activity itself, the Principal oversees the use of its Permissions by ARs.
The FCA has, in the past, identified issues and potential harm arising from firms operating this business model, and that most issues arising from Regulatory Hosting arrangements were due to Principals applying insufficient resource to overseeing ARs, lack of skills and experience in the different markets in which the ARs operated and lack of appropriate systems and controls to enable Principals to effectively oversee their ARs. As a result, the FCA has been carrying out multi-firm work and engaging with a number of firms operating as Regulatory Hosts to strengthen its understanding of this business model and how it might pose harm, as well as to address harm where it occurs.
The FCA will continue to consider the risks and benefits of this model and may carry out further work in 2023 but, after visiting firms and carrying out the work, the FCA has started to provide feedback to those firms included in the multi-firm review. Whilst this is aimed at Regulatory Hosts, these findings are generic and could easily be applied to all Principals. In particular, they should be applied by all Regulatory Hosts in seeking to satisfy themselves that their practices in the areas mentioned are sufficiently robust.
Insufficient non-financial resources
In some of the firms it visited the FCA considered that the Principal was applying too little resource to monitoring the activities of their ARs, such as through regular meetings, proper review of MI and relevant data, auditing of files and other measures to ensure their ARs continue to meet requirements. Where Principal firms are involved in wider activities and/or have other business commitments this may be even more of an issue.
Outsourcing of services
Several Principal firms ‘outsource’ some of the monitoring or compliance activities needed to onboard or oversee their ARs. Whilst the FCA’s Rules do not prevent this, it is important to stress that firms cannot outsource the responsibility for the AR, which sits firmly with the Principal.
Evidence and record keeping
Firms need to be able to adequately evidence their processes, actions, and decisions that they have taken and the rationale for their approach. In some Principal firms this evidence was either not robust enough or lacking completely.
Systems and controls
Some firms made good use of technology to help them make oversight and monitoring efficient, for example by scheduling reviews and reporting, and using software/online platforms to support effective oversight.
This, together with the recent Principal firms data request (the FCA is, we understand, now chasing ‘non-responders’) and the FCA’s latest 2023/24 Business Plan highlighting more work on ARs, means that ARs continue to be high on the FCA’s radar.
ICS has guidance and template documents which Principals can use to evidence appropriate monitoring and oversight of their ARs. Please contact us on 01892 539600 for more information or email .