On 28 September 2023 the FCA released a webpage setting out its analysis of the data and information collected from principal firms in 2021 and 2022 including from firms’ responses to information requests following the implementation of the new Appointed Representatives (AR) regime which came into effect in December 2023.
The purpose of the FCA’s publication is to show how the data collected has improved its understanding of the AR regime, including the risks and benefits, and to explain how the data is informing the regulator’s greater scrutiny of authorisation applications and more assertive supervisory approach.
Key messages from the FCA
Principal firms should take note of the FCA’s publication, which highlights the regulator’s key areas of concern, its intervention activity to date and intentions going forward:
- Since the FCA’s new AR department was established last year, its supervisory engagement has resulted in principals terminating their relationships with over 1,300 ARs and 12 firms making voluntary applications for the imposition of requirements (VREQs) to restrict how they carry out their business, as well as “many more informal interventions”.
- It is critical that principals ensure their Introducer ARs (IARs) are sticking to their limited activities and consider what checks might be appropriate. The FCA considers that IARs are lower risk provided that their scope of activity is strictly limited but has seen a number of cases where IARs have acted beyond their scope.
- The FCA is using profiling tools and outlier analysis to help it focus on the riskier firms, for example where there has been significant growth in a number of ARs of a principal firm, as well as in relation to overseas ARs.
- The FCA has taken action in some cases where firms’ professional indemnity insurance does not cover or adequately cover all activities of their ARs where required.
- The FCA has found that some principals do not have dedicated resources for overseeing AR activities; the regulator highlights the importance of monitoring significant AR/IAR growth and draws on an example which was flagged as an outlier because its number of IARs had significantly grown, a large proportion of which had a short contract. A review of the principal found a lack of staff available to effectively take on and monitor the firm’s IAR population. In this instance the firm agreed not to enter into any new AR/IAR arrangements or undertake further regulatory activity.
- By contrast, the FCA’s analysis indicates that most principals that offer regulatory hosting services (over 70%) have at least one full-time equivalent employee performing oversight for every five ARs in their network. The regulator gives an indication that this appears to be satisfactory resourcing as it has challenged some principal firms who reported lower levels of oversight on whether they can effectively perform their oversight functions with limited resources (although clearly requirements will vary depending on the circumstances).
- The FCA reiterates the greater risks of the regulatory hosting model, highlighting that its new data has revealed which firms operate this model and therefore on which firms the FCA needs to focus its own supervisory resources – the consequences of which have reportedly already resulted in: one regulatory host ceasing business; another agreeing to stop recruiting ARs and others reviewing and amending their approaches to overseeing their ARs.
- The FCA expects firms to terminate AR relationships where the AR has not carried out regulated activity for some time to avoid the risk of ARs taking advantage of the “halo effect” of being listed on the FS register to promote unregulated business.
Increasing intervention and enforcement activity
In the FCA’s most recent annual report which noted that during the year ended 31 March 2023 it conducted at least 23 enforcement cases into principal firms where it had identified potential misconduct related to ARs, with a total of four ongoing skilled persons reviews on principal firms that sit in the asset management and alternatives portfolios across the year ending 31 March 2023. We may expect an increase in intervention and enforcement activity as the regulator promises that its “next steps” will be continuing to use its improved data to strengthen its scrutiny of authorisations and approvals and to supervise high-risk principals more assertively – including through attestations for senior figures, requirements on firms, skilled persons reviews and appropriate enforcement action.
The final paragraphs of the FCA’s publication also serve as a reminder that, when assessing whether a principal firm has complied with the Consumer Duty, the FCA will also consider the actions of its ARs: “we would treat failure to comply with the Duty as a breach of the Duty by the principal”.