Working with unregulated introducers? Don’t fall foul of the FCA.

We would have concerns for any regulated firm that works with an unregulated introducer, without good due diligence.

You might think that the risk lies with the unregulated entity, “it's on them; we are not responsible for policing the regulatory perimeter”. However, we would urge firms to avoid this stance and consider the possible ramifications a little further.

The regulator perimeter is undoubtedly complex, and to be clear, this is not legal advice. However, a key issue is Article 25 of the Regulated Activities Order (RAO), or 'arranging deals in investments'. It can capture persons who simply bring parties together to facilitate a transaction (even if the transaction does not take place). Or, in short, introducing.

This regulated activity should be of concern. There are exemptions from regulation and these are widely used, but also appear to be widely misunderstood (or exploited) too. Exemptions only apply in specific circumstances and do not apply to all introducers, or all introductions.

There are also restrictions on making financial promotions (which is not itself a regulated activity under the RAO, but approving them will be soon). Again, exemptions are available (in the Financial Promotions Order), but key ones (for HNW and sophisticated individuals) are changing, and will be less easy to apply.

We would encourage any firm working with unregulated introducers to have a clear understanding of what that entity is relying on if they believe they do not need to be authorised (i.e. do they have legal advice?). It may be coincidence, but following the FCA's crackdown in recent years on principal/host firms (and corporate finance firms, where FCA suggested a FCA license may not be needed), there seem to be more and more unregulated introducers. Some of these may have been appointed representatives (providing an exemption from regulation) in the past.

But if they took the decision to be an appointed representative in the past, why does the introducer believe their business model has changed and they do not need to be exempt as an AR/IAR now?

We would also be concerned if the introducer seems unfamiliar with UK law (RAO/FPO), as it suggests they may not understand it, and might not be competent in establishing relevant controls. If that’s true, they could get you into trouble as a result.

Ultimately, there are several things that can go wrong. For example:

• The introducer is found to be breaking the law; the FCA ask you for your due diligence, and why you are dealing with such an entity. Can you answer?

• The FCA ask to see the due diligence, including how you satisfied yourself the introducer had appropriate controls in place? What can you provide?

• The FCA believe you are responsible for 'signing off' financial promotions from the introducer (who said you did). How do you respond? (Hint: signing off financial promotions is soon to be a regulated activity, so you might be breaching the law).

• The introducer is found to have a lack of controls; people have now lost money and made complaints, are you partially responsible?

  So, our advice to any firm working with unregulated introducers (however often) is to: do your due diligence and review your risk appetite.
  
  Not sure how or where to start? Speak to us.