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July 30, 2024
Many clients request assistance from ICS in getting an application for a new Appointed Representative (AR) over the line. The AR model can be hugely beneficial if it is operated correctly, for applicants who are starting out and not quite ready to be fully regulated, and Principal firms that want to branch out into other markets and reach a broader spectrum of customers. There are plenty of reasons to get on board with the model.
However, the FCA has been very vocal over the last few years about concerns it has in the AR space, stating that it has seen a higher level of fraud and mis-selling within this area compared to that for directly regulated firms 1 . In light of these concerns the FCA implemented new rules for Principal firms around oversight and governance of ARs, introduced a new RegData Return (REP025), and has increased its level of scrutiny on new AR applications.
Despite this, firms continue to want to appoint ARs. In its 2023 Q4 Authorisations statistics the FCA reported that 24,837 notifications in relation to ARs were determined in the 2023 period 2.
For those of you who want to get on board with this model, what do you need to know?
The FCA’s website will give you a broad outline of the regulator’s requirements, explaining that Principal firms need to undertake sufficient due diligence and checks to ensure that the prospective AR is financially stable, and that staff and management are competent. There is, however, no specific guidance on what due diligence and checks a firm needs to complete, just a vague comment that the FCA may ask for more information if the AR’s business model is ‘more complex’ 3.
There is also the matter of appointing Approved Persons; an AR will need to have at least one Approved Person to operate, and any application(s) for the individual(s) concerned must be submitted at the same time as the application for the AR. If the AR’s main business is insurance distribution, then all of its directors will need to apply for approved person status. This can hold things up as Approved Persons applications require information from third parties, such as DBS checks and regulatory references.
All of this needs to be submitted with a 30-day pre-notification period, meaning you have to have submitted the application at least 30 days prior to wanting the AR to go live. However, the FCA openly states that ‘in many cases it’ll take longer than 30 days to complete an AR appointment’ and can take up to (or longer than) 90 days for more complex applications. However, the FCA hasn’t set itself any targets for these applications other than its statutory deadlines, so it's almost impossible to define a timescale.
But why does it take so long?
You’ve completed your application, provided all the information that the application requests and, as far as you’re concerned, the ball is in the FCA’s court? Unfortunately not - more often than not the FCA will consider an application incomplete and revert back to the firm with a swathe of further questions, some of which you may think that you have already answered; some you will be thinking, why didn’t they just ask me this on the application form?!
We have helped a range of firms with their applications, so we are in a unique position to have a broader view of the questions that the FCA is asking, or likely to ask. The majority of these are around the AR’s business plan, the Principal firm’s oversight and monitoring of their prospective AR, conflicts of interest management between the firms, and the suitability of the Principal’s PI insurance. These additional questions are designed to negate the harms that the FCA has observed in the AR space. The key point is that the FCA wants to ensure that Principal firms have a better understanding and better oversight of their ARs, which is also in the Principal firm’s better interests, as ultimately it’s their head on the block if the AR isn’t following relevant FCA rules. Remember, the Principal firm, in effect, becomes the AR’s regulator!
If your prospective AR is an overseas firm, you can expect significantly more questions and a much higher level of scrutiny from the regulator, mainly due to its concerns about the Principal firm's ability to conduct suitable oversight and monitoring on a firm that isn’t located in the same country.
So, what do you actually need to consider before you complete your application to appoint a new AR?
- Complete thorough due diligence. The FCA expects that you will have considered the prospective AR’s financial situation and stability, the suitability of its staff to undertake regulated activity, the fitness and propriety of its senior management and whether the proposed operating model is in alignment with your own firm’s business plan. You will need to be able to evidence that you have completed these checks and what your findings were, as well as having some justification for your assessment outcome.
- Consider your own firm's resources. You will need to be able to evidence that you have enough resources to carry out a suitable risk-based monitoring program on the AR, additional financial resources to cover capital adequacy requirements, and PI Insurance to cover the AR’s activity.
- You will need to submit at least one Approved Person application, so think about requesting DBS checks and regulatory references for those individuals early so that you don't end up having to wait for these to come back before you can submit the application. But remember, the FCA will not accept a DBS check that is older than 3 months.
Need help? Speak to ICS; our consultants have plenty of experience submitting applications to the FCA, so we can help with navigating the Connect system and ensuring you have everything in place that the FCA may want to ask you about. We can also assist with the additional questions that you will be asked post application submission.
1. PS22/11: Improvements to the Appointed Representatives regime (fca.org.uk)
2. FCA Authorisations operating service metrics 2022/23 Q4
3. Recruit, change or terminate an appointed representative | FCA
