Last week, the FCA published its ‘final’ rules on the way principal firms oversee the activities of Appointed Representatives (ARs) and Introducer Appointed Representatives (IARs). These rules reflect the perimeter of the FCA’s current legislative remit, whilst also stressing the fact that HM Treasury continue to consider responses to their own ‘Call for Evidence’. They may be the final rules, but the reality is that firms can expect additional changes, with the Policy Statement referencing a number of areas where the FCA was unable to implement further change within the current legal framework.

The majority of the new rules take effect from 8^th December 2022 and as such, firms will need to begin work quickly to ensure they are in a position to comply. With the requirement of boards to oversee certain elements of the change, time should be scheduled for that to take place.

You can read more about the initial consultation process in our previous article on the FCA proposals on Appointed Representatives: Appointed Representatives – A Root And Branch Review

FCA Objectives

It’s worth q quick reminder of the FCA objectives as we look at the new rules for firms overseeing the activities of ARs and IARs. As always, a clear understanding of the FCA objectives will help firms when considering whether the process and business changes they implement are in reality achieving the necessary outcomes to satisfy the FCA that the desired outcomes will be achieved. The stated objectives are:

• Principals understand their responsibilities in relation to ARs, have stronger and better oversight of, and take more effective responsibility for, their ARs.
• The FCA can better challenge firms with, and those looking to appoint, ARs.
• Principals address problems with their ARs that are, or have the potential to, cause harm to consumers or markets.
• Consumers can access better‑quality information on principals and ARs and make good decisions when choosing products or services.

Key Messages

It’s worth taking a holistic view of what is incorporated in the new rules before looking at the detail. It contains some good news, and some bad news. Those firms engaged in “Regulatory Hosting” are now being required to identify themselves formally. The law as it stands does not provide for more specific regulation of such firms, but it is clear from the tone adopted by the FCA, and its requirement of such firms to identify themselves, that it hopes and expects the HM Treasury review to give it more powers.

As a general point, it seems that the FCA has recognised that IARs typically present less of a risk than ARs, with proportionate reductions in information requirements and new rules where the FCA has felt doing so does not compromise their general obligations to prevent consumer harm. Principal firms with significant numbers of IARs will welcome the proportionality of that approach.

Board members should take note of a number of new board-specific obligations, including the need for an annual self-assessment process which is signed off by the board and a requirement for the principal’s board to ensure that the senior management at its ARs remain fit and proper to act in that capacity. The process by which the operational teams provide the board with the necessary information to fulfill their obligations will need some careful consideration.

Lastly, there is some very strong guidance from the FCA for firms to consider the new rules on Appointed Representatives in the context of the recently released Policy Statement and rules on the new Consumer Duty. It is an area the FCA refers to frequently and provides some specific guidance on.

The New Rules

The new rules on Appointed Representatives fall into 3 broad categories. These are:

• Information & notice requirements
• Responsibilities of principals and expectations
• Overseeing ARs effectively

The general feedback to the Consultation Paper seems to have been broadly supportive and the majority of the new rules being implemented are as consulted on, with some minor changes.

Information & Notice Requirements

• Principals to provide information on the AR’s business
  The FCA have acknowledged it is appropriate for a more limited data required for IARs to be acceptable. Firms should note that the data must be provided for new and existing ARs and when any of the data changes. The data requirements include:
  • The primary reason for the principal’s intention to appoint the AR
  • The nature of the regulated activities the principal will permit the AR to undertake (primary and additional markets in which the AR will undertake regulated activity)
  • Whether the AR will provide services to retail clients
  • Whether the AR is part of a group. If so, provide the name of the parent undertaking(s)
  • Whether any individuals from the AR will be seconded or contracted to the principal firm to carry on portfolio management and/or dealing activities, and if so explain the rationale for entering into such an arrangement
  • Whether the AR was previously an AR of a different principal, and if so, why the previous relationship was terminated
  • Information about the nature of the financial arrangements between the principal and the AR
  • Non-regulated business of the AR. This includes:
    • The nature of the non-regulated business (financial or non-financial services activity)
    • The proportion of the non-regulated activities compared to the regulated activities in the first year following the appointment
  • Anticipated revenue from regulated and non-regulated activity during the first year of appointment
• Information about the nature of the financial arrangements between the principal and the AR.
  The intent is to help identify ‘financial outliers’ – Principal / AR relationships where the financial arrangements may suggest the requirements of the Consumer Duty are not being met. Firms should note this will include a new data set to help the FCA identify those ARs who are primarily paying their Principal for a Regulatory Hosting service. We anticipate these types of business are likely to see further change from the ongoing work the FCA and Treasury are conducting.
• Information on non‑regulated financial activities
• Estimations of revenue in the first year of appointment
  The FCA have now agreed this can be provided in bands for regulated and non-regulated activity.
• Reporting significant changes
  Firms will be required to report any changes to the types of regulated activity the principal allows the AR to undertake – this must now be done 10 days before the change takes effect.
• Pre‑notification for new AR appointments
  Principals must now notify the FCA of future AR appointments 30 days before the appointment takes effect
• Managing the potential burden of providing this information to the FCA
  The data will be requested via a Section 165 Data Request. Firms will have 60 days to complete and it will also ask them to confirm if they provide Regulatory Hosting Services. The FCA advises firms to start preparing for this work now.
• Verifying AR details
  Principal firms will now be responsible for verifying the data of their ARs on the Financial Services Register. There will be an annual attestation requirement and firms will need to have a process to check the data prior to this annual requirement. This will take effect from 2023 as the data will be verified as part of the first stage information process.
• Principals to provide complaints data on their Ars
  Principal firms will need to submit annual complaints data for each individual Appointed Representative within 60 days of the principals accounting reference date.
• Principals to provide revenue information for their ARs, broken down between regulated activity, non-regulated financial activity, and non-regulated non-financial activity
  This data will be required within 60 days of the principals accounting reference date.
• Notification in relation to regulatory hosting services
  Principals will now be required to notify the FCA of an intention to begin providing regulatory hosting services at least 60 calendar days before starting to provide these services.

Responsibilities of Principals and Expectations

• ARs providing functions or tasks for principals
  The FCA have recognised that in some cases, ARs provide services to their principal. These must not present a conflict of interest and where the principal is delegating a task or function to an AR, it must put appropriate safeguards in place. A firm should think of the current approach to outsourcing and what is considered to be good practice and if they follow that practice, they will be in the right place. For many firms this will require aq significant increase in due diligence (required in any event now) and oversight (also now required to a more robust level)
• Fit and proper expectations for principals
  Firms will now be required to assess the fitness & propriety, and competency and capability of individuals at ARs on an annual basis. It should be noted that the FCA have now agreed this will not apply to IARs. This requirement comes into effect on 8^th December 2022, but firms have 12 months within which to carry out the first review. Principals’ managing bodies – typically the board – would also need to review whether senior management at its ARs remain fit and proper to act in that capacity, on an annual basis.
• Strengthening the FCA expectations of firms to monitor activities outside the scope of appointment.
  Firms need to ensure they have a broad oversight of the activities undertaken by their ARs and IARs to ensure they have the necessary information to understand if harm is being caused to consumers that should otherwise be prevented through these regulations.

Overseeing ARs Effectively

• Sufficient resources
  Principals must now assess the adequacy of their own controls s (e.g. their risk, audit and compliance functions, organisational structures and reporting) and resources (e.g., people, processes, technology, facilities and information) at least every 12 months. Issues identified must be addressed as a matter of urgency and the FCA must be notified under Principle 11, or the principal should not appoint the AR until those issues are resolved.
• Monitoring appointed representative growth
  The focus here is on ensuring the principal remains satisfied it has the necessary resources to oversee an AR. Where it does not do so, and is unable to make the necessary changes, it should terminate its contract. Principals are advised to review their contractual terms to ensure they allow for termination in such circumstances.
• Overseeing ARs to a comparable standard as if they were employees of the principal
  Principals should be doing this to satisfy, and continue to satisfy, the Threshold Conditions.
• Effectively recognising, and limiting, the risk of harm
  Principals would be required, before appointing an AR and on an on-going basis, to ensure that an AR’s activities do not result in an undue risk of harm to consumers or market integrity.
• Annual review of AR’s activities and business and of fitness and propriety of senior individuals within the AR
  The FCA has introduced some flexibility to the final rules here to ease the burden on principals. It does not apply to IARs.
• Termination of AR contracts and winding down
  This requirement has been implemented as consulted on.
• Self‑assessment
  The firm’s governing body – the board – must review and sign-off, at least every 12 months, a self-assessment of its ability to meet the new rules on Appointed Representatives. Whilst there is not a formal requirement for this self-assessment to be provided to the FCA automatically, the FCA makes it clear firms should expect to be asked to produce it as part of the normal regulatory processes.

Implementation

The vast majority of the new rules take effect 8^th December 2022. Certain elements will be staged through the subsequent 12 months, particularly the new data requirements, where the FCA will conduct an initial Section 165 data request in the coming months to ensure its records are up to date. In the main though, this is a very short window for firms to act. The FCA’s own assessment is that the firms with the largest volume of ARs and IARs are well placed to respond to the information requests – the conclusion being that it may well be the firms with a smaller number of Appointed Representatives that struggle more with the new data requirements.

Conclusion

This new set of rules should be seen by the insurance community as an opportunity to implement change that the FCA has clearly stated it feels is long overdue. Some of the statistics it quotes on the proportion of consumer harm arising from the activities of Appointed Representatives are quite shocking. It seems to us that the parallel work being undertaken by the Treasury is very likely to lead to further change for principals and Appointed Representatives and firms should be prepared for this.  Though it may be speculation at this point as to what those changes will look like there are some very good clues.

With a number of the new rules focusing on the ability of firms to deploy sufficient resources to undertake the necessary oversight now expected of principals, this is an area that firms will probably need to plan for requiring additional headcount in the coming months and years.

If you are a board member of a firm that has Appointed Representatives, or responsible for briefing your board, you need to pay close attention to the new rules. There is a very short window for meeting some of these requirements.

ICSR has considerable experience of assisting Principals with Ars in creating and developing the appropriate frameworks from due diligence, through appointment and oversight during growth phases to and including the stage when ARs become authorised in the circumstances where that is their ultimate goal. If you would like to discuss any of the new rules and the way they affect your firm, please speak with any member of the ICSR team.