FCA Report of Enhanced Appointed Representatives Regime: Key Insights

The FCA has published its report on how principal firms are adapting to the enhanced rules for overseeing their appointed representatives (ARs), highlighting good practices and areas for improvement.

The FCA tested around 10% of the total principal firm population (270) firms to gauge how the industry was embedding the new rules, with around 250 via telephone questionnaire and 23 firms selected for an in-depth assessment. Items covered included new requirements such as the REP025 (complaints and revenue data) return and the new AR annual review/principal firm self-assessment process, but also generally included how principals oversee and monitor their ARs effectively.

A key thread runs throughout: principal firms must monitor their ARs to the same standard as they would monitor themselves.

Good Practices:

• Detailed due diligence during the AR onboarding process, including a thorough assessment of the AR’s business model, financial health, and regulatory risks that may be posed to the principal.

• Ensuring a clear delineation of responsibilities, both within their own firm and for ARs.

• Robust risk management frameworks tailored to the risks posed by ARs. These frameworks included setting risk appetites, monitoring AR activities closely and addressing risks as they arose.

• Regular and proactive monitoring of ARs, including reviewing documentation and setting clear communication channels for reporting issues.

Areas of Improvement:

• Some principal firms failed to understand the full scope of their ARs' business models: firms must ensure they have a complete picture of both unregulated and regulated activities undertaken by their ARs.

• A lack of tailored risk assessments and failure to assess new activities undertaken by ARs.

• Inadequate monitoring of ARs’ financial health. This is a significant risk, as financially unstable ARs could lead to operational failures, reputational damage, or non-compliance with FCA rules.

• Inadequate review of AR financial promotions, leading to non-compliant or misleading promotions reaching the market. Principal firms must take responsibility for ensuring that all promotional materials meet FCA standards.

• Only addressing issues as they arose rather than proactively. Regular compliance monitoring meetings, management information, and risk assessments were often lacking.

Key Recommendations for Principal Firms:

• Adopt a thorough and ongoing due diligence process to assess both new and existing ARs. Understand their business models, financial situations and any associated risks.

• Implement proactive monitoring that includes regular compliance meetings, real-time data (where possible), financial promotion checks and periodic reviews of AR activities.

• Develop tailored risk management frameworks that address the specific risks posed by individual ARs, including financial risks, conduct risks and regulatory risks.

• Regularly train AR staff on regulatory requirements and updates.

On the new AR annual reviews, the FCA noted that some were too generic and did not consider the overall suitability of the AR, with some principal firms opting for a ‘tick-box’ exercise rather than using this as an opportunity to comprehensively assess the adequacy of their ARs. Similarly for principal firm self-assessments, some firms neglected to adequately assess themselves and their reviews were found to be lacking in substance. For both, firms should ensure these are robust exercises that capture what’s set out in SUP 12.6A.

Termination and orderly wind down: the FCA found that some firms had not updated their AR agreements describe situations where they would have to consider terminating the agreement, such as a significant turnover in senior management or the AR acting outside of the scope of the agreement, and also had not sufficiently described in its offboarding policy the reasonable steps it would take in ensuring an orderly wind down of the AR’s business in the event of termination.

Principal firms should carefully consider how/if they are adequately meeting the FCA’s expectations set in the enhanced AR regime rules. This has been a key area of focus for the FCA over the last few years who have identified it as a key risk area to its operational objectives, so firms cannot expect to do the bare minimum and get away with it.

We expect the FCA to continue to focus on this area and expect they will reach out directly to firms again in the future to find out if firms are doing what they should be doing.

How we can help

ComplyCraft has several members of staff who have both worked in house at regulatory hosts for many years and since joining CC have assisted principal firms in meeting the enhanced requirements of the AR regime. This has included directly assisting principal firms with implementing the required changes, as well as creating AR annual review and principal firm self-assessment templates for firms to use with our guidance. We also have a comprehensive AR Toolkit, containing everything a principal firm would need to adequately monitor ARs. Please get in touch if you would like to know more.