The Financial Conduct Authority (“FCA”) has published data following a series of data requests sent to principal firms and authorisation information collected from firms during 2021 and 2022. The data outlines how the regulator supervises and regulates the Appointed Representative regime and demonstrates their expectations of principal firms and Appointed Representatives (ARs).
In December 2022, the FCA introduced enhanced rules for principal firms and ARs under PS22/11- Improvements to the Appointed Representatives regime. Under the new rules, the FCA set up a new AR department and principal firms must provide further information about their business and their ARs to the regulator.
The FCA have made their AR regime a priority. This is because principal firms and ARs receive greater levels of complaints and supervisory cases than directly authorised firms indicating “wide-ranging, cross-sector harm”.
Since the implementation of its new and enhanced rules, the FCA have shown that they are committed in continuing to use data to strengthen their scrutiny of authorised firms and approvals and supervise high-risk principal firms more assertively. This will be achieved through their new authorisation forms, new regulatory returns and a dataset covering all ARs from the regulator’s December 2022 information requirement, which asked principal firms for information about their ARs. The FCA have said it will “use all the tools at our disposal where we see harm emerging, for example attestations for senior figures, requirements on firms, skilled persons reviews and appropriate enforcement action.”
Some key highlights from the data
There are around 2,900 principal firms and circa 21,000 ARs and 14,000 Introducer Appointed Representatives (IARs). The majority of ARs/IARs are involved in Consumer Finance which makes up just under 44% of all ARs/IARs. The second largest is General Insurance & Protection which makes up over 27% of all ARs/IARs.
Whilst there is around 35,000 ARs/IARs, 81% of principal firms have a relatively small network size, with 51% having just one 1 AR and 30% of principals having between 2 and 4 ARs. Larger AR networks are less common, with 15% of principals having between 5 and 50 ARs and only 4% of principal firms having over 50 ARs.
In October 2021, the FCA collected data from a large sample of principal firms representing all the main markets which use ARs. The data showed that most principals have an established due diligence process when recruiting new ARs, and complete ongoing checks once an AR is appointed. Most firms conduct regular checks on suitability, financial position and criminal proceeding on a repeated basis. Principal firms are expected to provide high quality oversight and robust monitoring of their ARs to ensure good outcomes.
What does the data mean?
Principal firms must ensure they are complying with the rules set out under the AR regime. The FCA expect principal firms to;
- Have an enhanced oversight of ARs, including ensuring having adequate systems, controls, and resources.
- Conduct annual self-assessments demonstrating compliance with obligations as a principal, identifying any risks and gaps.
- Conduct a full annual review of AR’s activities and business, reviewing information on their ARs’ activities and business, including the fitness and propriety of senior management, the ARs’ financial position and the adequacy of the principal’s controls and resources to effectively oversee the AR.
- Monitor their oversight and supervision processes and ensure that they remain appropriate.
- Ensure that the principal firm notify the FCA of an intended AR appointment 30 calendar days before it takes effect.
- Provide annual reporting through regulatory returns and annual attestations.
Consumer Duty
It’s also important to note that the Consumer Duty came into effect at the end of July 2023 and reinforces the FCA’s approach to the AR regime.
Under the Consumer Duty, principal firms are required to oversee the actions of their ARs and must ensure that their ARs comply with the Consumer Duty. The FCA have stated that when assessing whether a principal firm has complied with the Consumer Duty, the regulator will also consider the actions of its ARs. Where an AR is failing to comply with the Consumer Duty, the FCA will consider this to be a breach of the Consumer Duty by the principal as the directly authorised firm.
In Summary
In July, the FCA & Practitioner Panel survey 2022/23 was published and showed that 56% of principal firms surveyed thought oversight of ARs by principal firms in their sector has improved under the new AR regime implemented in December 2022.
The FCA have shown their commitment to continuing a data-led and assertive supervisory approach of principal firms and intend to continue to test that firms have embedded the AR regime and the Consumer Duty into their firm and culture throughout 2023/24.
It’s important that principal firms get right their own due diligence and oversight processes as not doing so can not only lead to consumer harms but also lead to a detrimental reputation of their ARs.
ARs must ensure that they are comfortable with the level of support and framework which their principal firm is providing to them. This is why we work with our AR partners to ensure that they get the most of being a member of our network.
