Spotlight on the Appointed Representatives regime: what you should be doing now

5 Key areas of change

1. Timing

For appointments of new ARs, principal firms will have to notify the FCA of any future AR appointments 30 calendar days before the appointment takes effect (this is a reduction from the 60 days proposed in CP 21/34).   

In relation to existing AR relationships, there has been an amendment to the mechanism by which the FCA will collect the relevant data, which also has an impact on timing: the FCA will collect data on existing AR relationships via a section 165 information request (rather than by making rules requiring principals to submit the new data within 60 calendar days of the final rules coming into effect).  Principals will then have 60 days from receipt of the section 165 request to submit the data requested. 

This amendment to the consultation is not insignificant.  Whilst the FCA rationalises this approach by explaining that sending the data request through a section 165 requirement is “to minimise the burden of this one-off exercise”, and that experience suggests this is an effective way to collect data,  firms should be mindful that failure to comply with a requirement imposed by the FCA’s exercise of its statutory powers, could lead to being held in contempt of court.   It also appears unlikely that the FCA will deviate from this timeframe by agreeing an extension of the deadline for the information to be submitted: in PS 22/11 the FCA states explicitly that it considers the period between the publication of the policy statement and firms having to respond to the section 165 request, as providing principals with sufficient time to compile and submit the data requested.  Given that the FCA signalled in its policy statement that these s165 requests will be sent to firms “later in the year”, principals could, in theory, expect to receive the section 165 request about their ARs before the end of 2022 and would need to respond by a corresponding date in February or early March, notwithstanding the intervening holiday period, though this will depend on the preparedness of the regulator.   

Following feedback in response to CP 21/34, the FCA has decided not to take forward its proposal to request that principals provide details of the AR’s non-financial non-regulated activities.  

In addition the FCA is removing the request for information on the proportion of the non-regulated activities compared to regulated activities.   The FCA feels that data on estimated regulated and non-regulated income in other questions on the form provides sufficient information on this (see further under “Revenue” below). 

Nevertheless the FCA expects principal firms to have an understanding of the breadth of activities carried out by their ARs, including non-regulated activities - in particular if these are financial in nature or where the AR is large compared to the principal or where there is a heightened risk of the AR creating the misleading impression that the non-regulated financial activities it undertakes are regulated (known as the “halo effect”). This means that, whilst principals will not be expected to provide the FCA with details of an AR’s non-financial non-regulated business, information on the AR’s financial non-regulated activity will still be requested. 

3. Revenue

The FCA is not taking forward its proposal to require principals to provide to the FCA, on appointment, an estimate of the proportion of the revenue which the AR expects to generate in the first year from regulated activities as compared to non-regulated activities.

However, the FCA will be proceeding with its proposal to request separate estimates of revenue for each of the three categories of an AR’s activities:  (i) regulated; (ii) non-financial non-regulated; and (iii) financial non-regulated.  The FCA has made two key changes to its proposals on collecting revenue data in acknowledgment of industry feedback which highlighted the difficulties in making such revenue estimates:

• for revenue generated from non-financial non-regulated activities: the FCA will introduce revenue  “bands” for providing the estimated revenue from both regulated and non-regulated activities (for example, the FCA will expect firms to specify bands between £0 and <£100k, between 100k and <£250k, between £250k and <£1m,  and so on); and 
• for revenue generated from regulated activities and financial non-regulated activities:  the FCA will expect firms to provide this figure to the nearest £5k, and will allow firms to submit this information within 60 business days of the principal’s accounting reference date (and not 30 days proposed in CP 21/34). 

Principal firms should be aware that the FCA expects them to rely on the information available when providing estimates for an AR’s revenue for the first year. The FCA adds that if, for example, the AR is an existing business and/or was previously an AR of a different principal, it expects principals to use information that is available in relation to its revenue from regulated and non-regulated activities.  The FCA believes that “having this information will be useful in identifying potential risks, informing our supervision activities and how we target interventions”.

The regulator is proceeding with the proposal that principal firms intending to start providing regulatory hosting services will be required to notify the FCA of this intention at least 60 calendar days before starting to provide these services.  Whilst the FCA has made clear that it is not imposing any additional rules or restrictions on firms providing regulatory hosting services at this time, it warns that it will consider any potential interventions “in due course”.  

The FCA has further clarified that firms already providing regulatory hosting services will not have to submit a separate notification, but will be able to include the relevant notification within the section 165 request to principal firms with existing ARs. 

Potential interventions may also come from HM Treasury. The earlier HM Treasury call for evidence on ARs called regulatory hosting the business model “perhaps furthest removed from the use of ARs originally envisaged”. It also queried whether ARs carrying on regulated activities under  principal firms providing regulatory hosting should be directly authorised. With the new FCA rules being settled by the publication of PS 22/11 formal HM Treasury proposals may now follow. 

In CP 21/34 the FCA proposed requirements on principal firms to (a) carry out an annual review on each of its ARs (with the exception of their introducer ARs), including on the fitness and propriety of senior individuals at the AR and the AR’s financial position; and (b) conduct a self-assessment of the principal firm’s own compliance with the new rules.  In light of feedback following consultation that these requirements would be unduly burdensome for some principal firms, and especially for larger networks with many ARs, the FCA has determined that:

• principal firms can satisfy the annual review requirements by integrating them into their existing internal reporting processes (provided they meet the standards set out in the FCA’s rules and guidance);
• annual reviews can be conducted by “responsible individuals” below the level of governing body (i.e. not necessarily the governing body itself) “with a suitable degree of knowledge and authority”, but that “significant issues” identified at the relevant AR should be escalated to the governing body; and
• the principal firm’s self-assessment is a single document that must be signed off by the governing body at least every 12 months and should focus on how the principal firm is meeting its responsibilities in relation to its ARs; it is not expected that the principal firm create a new document each year and a firm with multiple ARs can maintain a single self-assessment document covering all of its AR relationships.  

Whilst the FCA’s annual review rules and guidance will come into effect with the rest of the regime on 8 December 2022, principal firms will have up to a maximum of one year to carry out their first annual review – a significant date for firms to mark in the calendar, now. 

Key steps for principal firms to consider

Whilst some principal firms may be quite advanced in their preparations for the new regime,  we set out below some key points in relation to a firm’s governance of its AR relationship, which may assist in ensuring compliance with the new requirements coming into effect from 8 December 2022.  

Given the significantly enhanced notification and information requirements under the new regime, steps that principal firms may wish to consider include the following:

• establish a dedicated sub-committee of the board, responsible for oversight of the implementation of the FCA’s final rules;
• allocate ultimate responsibility and oversight for this project to a senior management function holder with adequate experience of implementing and embedding regulatory change;
• include within the terms of reference and scope of the sub-committee a review of the:
  • principal firm’s governance and control framework in respect of each of its AR relationships with a view to ensuring that quality management information reporting and escalation procedures are sufficient to meet its regulatory reporting obligations throughout the relationship; and
  • existing contractual arrangements with each of its ARs. 

In the immediate term, principal firms must be prepared to respond to the section 165 request from the FCA.  This should include a review of the existing contractual framework to ensure that the AR is contractually obliged to provide the relevant data, and consideration of what steps should be taken where the AR fails to provide such information, or provides misleading information, in breach of its contractual obligations.  Similarly, contractual arrangements should be reviewed to ensure that they allow for the principal firm to terminate such arrangements in the event that it determines that it is no longer able to adequately oversee the activities of the AR, pursuant to its continuing obligations set out in the FCA’s Handbook – an inevitably higher threshold to consider under this new, enhanced and more prescriptive regime.