FCA POLICY STATEMENT PS22/11: IMPROVEMENTS TO THE APPOINTED REPRESENTATIVE REGIME (THE “AR REGIME”)
WHAT DO THE NEW RULES COVER AND WHEN WILL THEY BE COMING INTO EFFECT?
On 4 August 2022, the FCA released Policy Statement PS22/11: Improvements to the Appointed Representative Regime. The Policy Statement follows a Consultation Period between December 2021 and March 2022 where the FCA set out proposals seeking to improve the AR Regime and invited feedback from authorised firms. Following an assessment of the feedback the FCA have implemented updated rules and expectations outlined in the Consultation Paper in the Policy Statement (the “Rules”). The amended rules will take effect from 8 December 2022.
WHAT IS THE AR REGIME?
The AR Regime offers firms who intend to conduct certain regulated activities an exemption from full independent authorisation by the FCA. Principal Firms, which have independent authorisation by the FCA, may permit firms, subject to a number of conditions, to operate under their FCA license. As such, the Principal Firm is liable to the FCA for the activities of the AR as if the Principal Firm had conducted the activities themselves. The AR Regime is an attractive option to firms, particularly small and emerging firms, as it provides efficiencies and a reduced burden in relation to time to market, costs and required resources.
WHY ARE THE FCA AMENDING THE AR REGIME?
The FCA have determined that the AR Regime has been the subject of abuse in recent years. This includes Principal Firms authorising AR’s without conducting adequate due diligence and ensuring that the necessary frameworks are in place in order to properly monitor and supervise the AR. Please see the Briefing Note: The Greensill Collapse: What are the consequences and what will the Post-Greensill environment look like (March 2021) and Response by Brooklands Fund Management Limited to CP21/34: Improving the Appointed Representative Regime (March 2022).
The Policy Statement notes that the AR Regime “has benefits”, it warns that “risks of harm” have been identified. As such, the FCA’s amended rules are focused on:
1. collecting additional information on ARs and strengthening reporting requirements for principals (Chapter 3); and
2. clarifying and strengthening the responsibilities and expectations of principals.
The Rules seek to enhance the FCA objectives as follows:
1. increase consumer protection by providing additional clarity on principals’ responsibilities and our expectations of them.
2. Improve data collection will allow us to intervene early, reducing consumer harm
3. strengthen the oversight of ARs by principals and will lead to greater stability and resilience. This supports both our consumer protection and market integrity objectives.
4. Reduce level of misconduct and complaints across the market as a whole will enhance market integrity.
5. Effective competition is driven by a wide variety of firms performing regulated activities. Our proposals will ensure the AR model can operate effectively, with firms upholding standards, and competing in consumers’ interests. The FCA expect this will in turn raise the quality of competition across markets.
AMENDMENTS TO AR REGIME
| Information and Requirements | ||
| FCA Proposals | Feedback Summary | Rules |
| Principals notify the FCA of future AR appointments 60 days before the appointment takes effect. | Almost all respondents agreed with the proposal to require pre‑notification of AR appointments. Some considered 60-day advance notice to be too long and argued it might create business disruption. | The FCA are reducing the pre-notification period for new AR appointments from 60 calendar days to 30 calendar days. |
| Within 60 days of rules coming into force, principals must provide information on their existing ARs. | The majority of respondents acknowledged the need to provide the FCA with the additional data for existing ARs as well as new appointments. Some respondents called for a longer period to provide this information, and for us to consider options for bulk uploads. | The FCA are proceeding with the proposal as consulted on but not through the final rules.
These data are key to enabling us to identify potential issues with principals and ARs. For existing ARs, the FCA will collect the data via a Section 165 data request. Principals will then have 60 days to submit the data to us on all their existing ARs. The FCA consider that the period between publishing this PS and firms having to submit the data to us gives principals enough time to compile and submit these data. |
| Principals provide more information on the business of their ARs, including the nature of the regulated activities the ARs will conduct. | The FCA received general support for this proposal. Some challenged the proposals to require information on ARs’ non-regulated activities. Others considered that providing revenue estimations is difficult and might be inaccurate. | The FCA are not taking forward the proposal to require principals to provide details on any non-regulated non-financial activities an AR performs, but will require this information for financial non-regulated activities. They are not taking forward the proposal to require principals to provide, at appointment, an estimation of the proportion of a proposed AR’s non-regulated activities compared to its regulated activities in the first year following the appointment.
The FCA are introducing revenue bands for reporting anticipated revenue of the AR from regulated and non-regulated activity during the first year of appointment. |
| Principals provide complaints data and revenue information for ARs on an annual basis. | Some respondents, mainly larger networks, argued that although they already have complaints and revenue data on their ARs, providing them to the FCA would be burdensome and costly. They sought changes to the type, and level of detail, of some of the data the FCA proposed be submitted. | The FCA are giving principals more time to annually report AR complaints and revenue data, from up to 30 business days after the principal firm’s accounting reference date, as proposed, to up to 60 business days. The FCA are introducing revenue bands for annually reporting AR revenue from non-financial non-regulated activities. |
| The FCA publish on the Register the nature of the regulated activities the principal permits the AR to undertake. | Respondents supported having more information on ARs’ permitted activities on the Register. But many challenged our proposal saying the information already on the Register for authorised firms, and the information the FCA proposed to include on ARs, would not be useful for consumers.
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The FCA are not adding more information on the nature of regulated activities ARs are permitted to conduct to the FS Register at this time. |
| Require principals to notify us whether they provide currently, or intend to provide, regulatory hosting services. | The FCA received general support for this proposal. Some respondents considered that the definition of ‘regulatory hosting’ is too wide and should be changed. | The FCA are refining the definition of ‘regulatory hosting’ in light of feedback. The only effect of firms’ business models coming into scope of the definition of ‘regulatory hosting’ is that these firms will need to notify us of their intention to provide such service in advance. The FCA are not imposing any additional rules or restrictions on firms which provide such services at this time. |
| Responsibilities of principals and our expectations | ||
| Apply enhanced oversight of their ARs, including ensuring adequacy of systems and controls, sufficiency of resources and monitoring AR growth. | Most respondents agreed with or had no comments on these proposals. Some respondents thought the proposals would be burdensome for firms, particularly for larger networks with many ARs. More specifically, some respondents felt that the proposed annual review and self-assessment requirements would be unduly burdensome for networks. These respondents also considered it excessive to require review and approval of the proposed self-assessment by the principal’s governing body. Other respondents reported already carrying out similar checks and reviews so reflected that the proposed requirements would not present a burden. Many of these respondents also welcomed increased oversight and accountability at governing body level. Some respondents requested confirmation that the FCA do not expect them to have an employee-employer relationship with the AR (where the FCA proposed principals have a ‘comparable standard’ of oversight). | The FCA clarify that the annual review requirements can be met by principals integrating them into existing internal reporting processes, so long as they continue to meet the standards set out in our rules and guidance. The FCA also clarify that the annual reviews can be conducted by responsible individuals with a suitable degree of knowledge and authority below the governing body’s level, with significant issues identified at specific ARs escalated to the governing body. The FCA explain that the self-assessment should focus on how the principal itself is meeting its responsibilities in relation to all of its ARs. It is a single document designed to identify any risks and gaps in compliance with the firm’s obligations as a principal, and must be reviewed and signed-off by the principal’s governing body, at least every 12 months.
The FCA have also made some of the proposed rules in the CP guidance instead. |
| Take more effective responsibility for their ARs, including by monitoring and assessing the risk of harm to consumers and market integrity and overseeing ARs to a comparable standard as if they were employees of the principal.
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| Have clarity on the circumstances where they should terminate an AR relationship and assist ARs with an orderly wind down; and
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| Annually review information on ARs’ activities, business and senior management. Principals would also need to prepare a self‑assessment document at least once a year, covering how they meet the requirements of the policy. | ||
| Additional feedback | Additional feedback Some respondents suggested that there should be an implementation period of at least 12 months. A few respondents considered some of the proposals to be costly, arguing that we underestimated the costs in the CBA in some places, particularly for larger networks. A handful of respondents considered that the AR regime was not at all fit for purpose and that the regime should be phased out over time and ultimately removed. | The FCA are implementing a 4 month implementation period before the changes take effect. The FCA have put in place transitional arrangements to give firms more time to comply with some of the new rules, particularly those that require firms to submit information on an on-going basis and to review their ARs and self-assess annually. The FCA have updated the cost benefit analysis and increased the estimated costs for larger firms in implementing the new requirements. They still consider the benefits of the proposals warrant the proposed interventions. The AR regime is set in primary legislation, and the FCA does not have the powers to remove it. The Treasury have invited views on the AR regime in its CfE and the FCA continue to work closely with them on this. |
HOW WILL THIS AMENDMENTS AFFECT AR’S?
As a general rule, AR’s must expect to provide full transparency to their Principal Firm although this is not a new principle introduced by the Rules. AR’s must ensure that they have established reporting lines with their Regulatory Principals to ensure that all data held is accurate and is reportable to the FCA.
In addition, prospective AR’s should ensure that they factor the 30 calendar day pre-notification into their timetable and their budget projections.
HOW WILL THE FCA AFFECT BROOKLANDS?
The Brooklands AR Policy incorporated the bulk of the requirements introduced by the Rules prior to the release of the Policy Statement.
However, the Brooklands Compliance Team must ensure the following prior to 8 December 2022:
• All data required to be reported in relation to AR’s is collated, verified and prepared for submission (for details on the information required please refer to section 2.9 of the Policy Statement). We must also verify the accuracy of this information on a monthly basis (included in amended Monthly Attestation and discussed at the Monthly AR Meeting) in order that we are informed of any impending changes which will allow us to inform the FCA of any significant changes within 10 days of the change taking effect.
• Data collected in relation to AR’s anticipated revenue (split between regulated and non-regulated activities) is collected, verified and capable of reporting.
• Data collected in relation to AR’s revenue and complaints is collected, verified and capable of reporting within 60 business days’ of Brooklands financial year end.
The Brooklands Sales and Marketing Teams must ensure that prospective AR’s are aware of the 30 day notification period prior to conducting regulated activities and must include details of the reporting required to ensure prospective AR’s are capable of providing the data.
The Brooklands Management Team shall conduct an Annual Review in relation to the activities of the AR’s which includes the following:
• Review of the AR Policy and System and Controls to ensure it remains fit for purpose. The AR Policies and Procedures must ensure that the activities and personnel of the AR’s are monitored and supervised as diligently as if the activities were conducted by Brooklands itself and the AR Personnel were employed directly by Brooklands;
• Review the AR Termination Procedure (including triggers to terminate an AR and the steps taken as a result);
• Review of each AR to ensure that the risk profile of each AR remains appropriate and incorporates the risk the AR poses to it clients, Brooklands, the market as a whole and the FCA; and
• Review of each AR to ensure it has adequate corporate governance. Such review shall include ensuring each AR has adequate systems, controls and resources and senior management.
The above shall be in addition to the Monthly Compliance Meeting and Quarterly Management Meeting and shall be documented and kept available for review and inspection.
To access the Policy Statement in its entirety please follow the below link: https://www.fca.org.uk/publication/policy/ps22-11.pdf
If you have any question relating to the content of this Briefing Note please do not hesitate to contact a member of the Brooklands Compliance Team by email at compliance@brooklandsfund.com.
