In September 2023, the FCA published data from its 2021 and 2022 data requests sent to principal firms and outlined how they are on improving the appointed representative's (ARs) regime through greater use of data and what they expect from firms.

What is an appointed representative (AR)?

An AR is effectively 'renting' the principal firm's permissions and is restricted to only those regulated activities that the principal is authorised to carry out. The principal firm accepts responsibility for monitoring the AR.

What are the main failures highlighted by the FCA of principal firms' oversight of ARs?

Due diligence failures

Data collected by the FCA shows that the majority of principals have established due diligence checks when recruiting new ARs and are completing ongoing checks. However, failures were noted in not repeating due diligence checks relating to ongoing suitability, financial resilience, or criminal records checks.

Recruitment approach

The responsibility for making sure that the AR is fit and proper, and that they comply with the FCA rules and operate within the scope of their appointment falls on the principal. The FCA sees frequent examples among the outlier firms with weak AR recruitment arrangements. This includes poorly completed applications and insufficient detail being provided on reference checks, competency assessments, conflicts management and rationale for appointment in view of adverse information disclosed. Where the FCA has seen significant issues, principal firms have agreed to stop recruiting ARs until these issues are addressed.

Dedicated resources for overseeing AR activities

When the FCA review principal firms, they look for reassurances that principals oversee their ARs adequately. The FCA has found examples where this is clearly not the case. The FCA has seen principals with no clear process or structured plans for how they oversee their ARs or where monitoring activities are not carried out in sufficient depth, if at all. In these cases, the FCA has required these principal firms to take a range of actions to address the FCA's concerns, including implementing stronger systems and controls and stopping AR recruitment.

It was noted that 70% of principals had at least one full-time equivalent (FTE) employee performing direct oversight for every 5 ARs in their network1. However, there were some outliers that reported even lower levels of principal oversight, and the FCA have challenged these principal firms on whether they can effectively perform their functions with limited resources.

Dormant AR relationship

The FCA noted that some principals reported that their ARs generate no revenue from regulated activity, indicating they may be dormant ARs. Where an AR has not carried out regulated activity for some time, its principal should consider whether the AR relationship remains appropriate. If it appears the AR is carrying out no regulated activity, its' principal should consider terminating the relationship if appropriate. This is seen to reduce the risk of ARs taking advantage of the potential 'halo effect' of being listed on the Financial Services Register purely to promote risky unregulated activities.

About the authors | Meet our compliance experts

Matthew Hazell, Managing Director – Newgate Compliance

Matthew joined Newgate Compliance from inception in May 2014 as Director of Consulting.

Andrew Coffey, Junior Consultant – Newgate Compliance

Andrew Coffey joined Newgate in April 2022 and is part of Newgate's appointed representative hosting business (Aldgate), handling the onboarding of newly appointed representatives (ARs) under the Aldgate umbrella, monitoring Aldgate's ARs and ensuring that Aldgate fulfils the expectations the FCA places on Principle firms.

Footnote

1. www.fca.org.uk/data/improving-appointed-representatives-regime-through-greater-use-data, September 2023

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