Appointed Representatives: The enhanced regime following lessons from Greensill Capital
06 October 2022
Following publication of the Treasury Select Committee’s report in 2021 on Lessons from Greensill Capital, the TSC made a series of recommendations for the FCA and HM Treasury to consider. These included reforms to the Appointed Representatives regime that was first introduced in 1986, with a view to limiting the scope of the regime and accordingly reducing opportunities for misuse.
Greensill Capital Securities Limited operated in the UK as the Appointed Representative (“AR”) of an unrelated Principal firm. Under the arrangement the Principal firm, rather than the FCA, was ultimately responsible for overseeing GCSL’s narrow scope of regulated activities. However, when the firm filed for insolvency in 2021, questions were raised regarding the operation of GCSL under the AR regime. The FCA’s data shows that, on average, more issues arise from Principal firms and ARs than from directly authorised firms.
Changes to the AR Regime
The AR regime is enshrined in primary legislation and so the FCA does not have the power to remove it. It does however have the power to introduce reforms, and PS22/11 sets out the changes that will come into force on 8 December 2022, following a 4 month implementation period.
In its Business Plan and Strategy for 2020-2025 the FCA set out its commitment to an extensive programme of work and reform in respect of the current AR regime. Measures include the introduction of a fee to be payable by the Principal firm for each of their ARs; greater engagement with, and scrutiny of, Principal firms as they appoint ARs; and targeted supervision of Principal firms by the FCA utilising improved data and analytical tools.
December 2021 Consultation by the FCA
In December 2021 the FCA published consultation paper CP21/34 regarding what reforms may be needed to the AR regime, focusing in particular on clarifying and strengthening the responsibilities and expectations of Principal firms including their reporting responsibilities, and collecting additional information from Principal firms in respect of their ARs.
The feedback to the consultation revealed that the majority of respondents acknowledged the need for Principal firms to provide the FCA with additional data on their ARs.
The New Consumer Duty
Some elements of the reforms to the AR regime are intended to complement the FCA’s new Consumer Duty which will come into force on 31 July 2023 in relation to all new products and services that remain on sale or open for renewal1. The Consumer Duty will impose a higher standard of care in respect of retail customers and both Principal firms and ARs should consider how the Duty applies to them. Given that the overall aim of the new Consumer Duty is to bring about increased focus on customer outcomes, this aligns with and will in part be facilitated by the FCA’s enhancements to the AR regime of requiring Principal firms to more actively assess, and prevent as far as possible, any activities by an AR that create a risk of harm to consumers.
Background – what is an AR?
Section 39 of the Financial Services and Markets Act 2000 (“FSMA”) defines an AR as a person who is not directly authorised by the FCA to carry out regulated activities, but who enters into a contract with an authorised person (known as the Principal firm) to carry out certain regulated activities specified in the FSMA 2000 (Appointed Representatives) Regulations 2001. By entering into a contract with a Principal firm, an AR can then carry out regulated activities (that are within the list prescribed by regulation, within the permissions of the Principal firm, and covered by the AR contract with the Principal firm) such as arranging deals in investments, safeguarding and administering investments, and advising on investments.
The AR carries on regulated activity under the responsibility of the authorised Principal firm, which is therefore responsible for making sure that the AR is fit and proper and complies with regulatory rules, requirements and standards.
What are the key changes to the AR Regime?
The FCA is reducing the pre-notification period for new AR appointments from the 60 calendar days proposed in CP21/34 down to 30 calendar days. The expectation of Principal firms is therefore that they should have conducted their own due diligence on the AR before making the notification to the FCA. The FCA has clarified that where the appointment of an AR involves an Approved Persons process, the 30 days pre-notification period is not in addition to the existing three-month period for determination of Approved Persons applications - any checks on the appointment of the AR will be done in parallel with the Approved Persons process. A Principal firm must also notify the FCA 10 days in advance before any changes in the AR’s regulated activities occur.
Increased Data Requirements
The FCA is also proceeding with the proposal (as consulted on), in respect of gathering data from Principal firms, which is key to enabling the FCA to identify potential issues with Principal firms and ARs. Accordingly, in making the prior notification to the FCA, Principal firms will be required to make much more information about proposed ARs available to the FCA. This information must be provided to the FCA 30 days before appointing a new AR. The information required includes, amongst other things, the primary reason for appointing the AR and the nature of the regulated activities that the Principal firm will permit the AR to undertake. For existing ARs, the data will be collected via a section 165 FSMA information requirement. Principal firms will then have 60 days to submit the data to the FCA on all their existing ARs. It should be noted that the FCA is not at this time taking forward the proposal to include on the FS register the nature of the regulated activities that Principal firms permit their ARs to undertake.
Annual Reporting Requirements
There are additional annual reporting requirements (and in any event within 60 days of the Principal firm’s accounting reference date) for a Principal firm to verify the details of their ARs and confirm whether the details on the Financial Services Register remain accurate; to provide data on an AR’s regulated and non-regulated financial activities; and to provide complaints data relative to the regulated activities performed by the AR.
The FCA is not taking forward the proposal to require Principal firms to provide details on any unregulated non-financial activities an AR performs, but will require this information for financial unregulated activities. The FCA is also introducing revenue bands for reporting anticipated revenue of the AR from regulated and unregulated financial activity during the first year of appointment. It is also introducing new rules that include a finalised definition of “regulatory hosting” which covers firms that appoint ARs where the Principal firm itself does not directly carry on the regulated activities in question other than through its AR. Under the new rules, Principal firms will be required to notify the FCA of their intention to provide regulatory hosting services at least 60 days prior to commencing the hosting arrangement.
What can Principal firms expect going forward?
The enhancement of the regime is likely to assist Principal firms in managing their relationships with ARs and ensuring that ARs adhere to regulatory standards and requirements, thereby fostering, amongst other things, a greater degree of consumer protection. Whilst it may appear that the changes place a greater burden on Principal firms, in the long term it will mean better responsibility and oversight of AR activities which will likely lead to less need for regulatory intervention by the FCA.
Principal firms need to be prepared to meet the increased data and reporting requirements under the enhanced regime and need to ensure that they carry out robust due diligence when going through the process of appointing a new AR. They will also need to fully consider the primary rationale for appointing a particular firm as an AR and the nature of the services to be provided (including whether these will be provided to retail customers).
In practical terms, Principal firms will need to adjust quickly to the reporting and notification requirements. The regulatory expectation is that by 8 December 2022 Principal firms will have in place effective and comprehensive processes and systems that enable them to address risks to their ability to effectively manage their AR relationships, meet the FCA’s data requirements and overall ensure a better quality of AR supervision and oversight.
1On 31 July 2023, the Consumer Duty will apply to all new products and services, and all existing products and services that remain on sale or open for renewal. It will then come fully into force on 31 July 2024 and will apply to all closed products and services. See our earlier article on this here: Lewis Silkin - The FCA New Consumer Duty: Principle 12 is here.