The Financial Conduct Authority (FCA) has recently published guidance on best practices and areas for improvement to assist principal firms in effectively overseeing their Appointed Representatives (ARs). This guidance stems from a comprehensive review of how principal firms are complying with the enhanced AR regulations implemented by the FCA in December 2022.
Becoming an AR offers a streamlined path for unauthorised entities to conduct financial services activities that are regulated.
In this article, our financial services legal experts look at the benefits you can gain from being an AR, the process you’ll go through to become one and the responsibilities of the principal firms that will oversee you.
Contents:
What is an Appointed Representative?
As an AR, you carry on regulated activity under the responsibility of a firm authorised by the FCA for that activity, known as your ‘principal’. Your principal firm holds full accountability for ensuring that you are fit and proper and must take reasonable steps to ensure that you comply with FCA rules.
Why choose the AR route?
As an AR, you are an ‘exempt person’ in carrying out activities for which your principal has accepted responsibility in writing, so far as you act within the scope of your AR agreement. You therefore do not need FCA authorisation to undertake activities where you are an exempt person. The process of becoming an AR is faster than obtaining authorisation, allowing you much quicker market entry. As an Appointed Rep, you also benefit from your principal’s expertise in compliance, risk management, and operational support.
Your principal must have appropriate oversight of you, including taking reasonable steps to ensure you act within the scope of your appointment; access to your premises, staff, and records to ensure compliance with FCA rules; as well as annual reviews and self-assessments.
Activities of ARs
The activities that you agreed upon between yourself as an AR and your principal are limited by:
- Regulations – there are some limitations on which regulated activities you can carry on as an AR; and
- Your principal’s FCA permissions – your principal can only take responsibility for an activity for which it is authorised.
The scope of your appointment as an AR is set out in the agreement with your principal (an AR Agreement). Common activities you might engage in include:
- Insurance distribution – acting as an intermediary in the sale and administration of insurance policies.
- Investment advice – providing recommendations on securities and other financial instruments.
- Debt-related activities – such as managing debt for others, debt collection and debt advice.
- Credit broking – introducing customers to a credit provider or other credit brokers.
Becoming an AR
Becoming an AR involves several key steps for you:
- Negotiating with a principal firm that has the appropriate FCA permissions for your intended regulated activities.
- Your principal conducts thorough due diligence to ensure you meet the ‘fit and proper’ suitability criteria.
- Entering into a written AR Agreement, detailing your permitted activities and compliance obligations, which must include certain terms prescribed by regulations and the FCA Handbook. Our financial services legal experts can help you to review your AR Agreement to both ensure it is compliant and advise on any areas of commercial risk (which are often addressed in an AR Agreement alongside the required terms).
- Your principal must notify the FCA of your appointment at least 30 days before the appointment takes effect.
- Your principal must carry out additional checks in appointing you for insurance distribution and for this activity in particular, you cannot start acting until you appear under your principal’s entry on the FCA Register.
The FCA often takes longer than 30 days to assess an AR appointment. If an individual also needs to be approved by the FCA to carry out roles as an ‘Approved Person as part of the AR appointment, the registration may take up to 90 days, or longer if further information is required.
The principal’s responsibilities
Your principal firm has a duty to oversee your compliance with FCA rules and ensure that you as the Appointed Representative operate within the scope of your appointment, including:
- Fitness and propriety – assessing your fitness and propriety, financial stability, and suitability before appointment.
- Regular reviews – regularly reviewing your activities, business, and senior management.
- Complaints – providing annual complaints data and revenue information related to your operations.
- Oversight – implementing appropriate levels of oversight and monitoring, identifying conflicts of interest, and assessing the risk of harm to consumers and market integrity.
- Compliance – taking reasonable steps to ensure you act within the scope of your appointment.
- Risk management – identifying and mitigating risks associated your activities and any material changes.
- Training and competence – providing you with ongoing training to maintain your competence levels and ensure you continue to meet the necessary standards (such as the Consumer Duty) for the regulated activities you carry on as the Appointed Rep for which your principal has accepted responsibility.
- Reporting obligations –keeping the FCA informed of your activities and any material changes.
- Financial resources and insurance –holding adequate financial resources and insurance to cover your activities, both current and past, to protect against potential liabilities.
FCA good practice guidance
FCA rules and guidance for principals are mainly set out in chapter 12 of the Handbook’s Supervision Manual (SUP 12). Further rules and guidance were introduced for principals in Policy Statement PS22/11.
The FCA summarises good practice and areas for improvements for principal firms who have Credit Broking permissions. The findings of the more recent review of principal firms is also a useful indicator of the FCA’s view on good practice and areas for improvement.
The good practices identified in the FCA guidance should be seen as examples of what the regulator is looking for, rather than specific obligations. Your principal firm must have robust procedures, systems, and controls for conducting due diligence on you as its AR – at the outset, and on an ongoing basis. Your principal must also be clear on when and how to terminate your relationship.
An alternative to direct authorisation
If you are looking to carry on regulated financial services activities, becoming an AR offers you a viable alternative to direct authorisation, provided you as the Appointed Rep are willing to operate under the regulatory umbrella of a principal firm. The AR framework offers you a streamlined path to conduct regulated activities within the responsibility and guidance of a principal firm. This oversight relationship can benefit both you and your principal, allowing you as an AR to leverage your principal’s resources and expertise, whilst enabling principals to expand their network.
If you are considering the AR route, you should consult with our financial services legal experts. We can provide you with legal advice on becoming an Appointed Rep, as well as draft or review your AR Agreement.
