FCA consults on changes to Appointed Representatives regime
The Designated Representatives (ARR) regime, a well-known and important feature of the UK regulatory landscape, allows certain companies – Designated Representatives (ARs) – to conduct regulated activities without having to be authorized by the Financial Conduct Authority (FCA). . For all RAs, a fully authorized company (a Principal) holds the relevant regulatory authorizations and is responsible for the conduct of the RA acting under those authorizations. The FCA is concerned that principals and RAs are the source of a disproportionate level of harm to consumers due in large part to insufficient oversight by principals. The FCA is therefore now proposing important new rules and guidance that are primarily aimed at increasing the regulatory burden on constituents to oversee RAs and provide information to the FCA. According to the FCA, there are currently around 40,000 ARs with 3,600 principals. This consultation is therefore of great importance.
Context of the consultation
While the proper functioning of ARR depends on the quality and level of effective oversight by managers, in general, ARR works well and plays an important role in reducing cost and resource barriers to entry. in the UK regulated sector.
However, the FCA is concerned that ARs represent a disproportionate amount of harm to consumers. For example, a high proportion (61% in the period 2018 to 2019) of Financial Services Compensation Scheme (FSCS) payments go to RAs or principals. Managers also receive significantly more complaints per million pounds of income than non-managers. The FCA attributes these trends in large part to inadequate supervision by principals. Therefore, many of the proposed changes (summarized below) aim to place a greater regulatory burden on constituents and require them to provide more information to consumers and the FCA so that constituents can be held more accountable. effective.
Summary of changes in consultation
The most significant proposed changes are summarized below. We then provide some general comments on how these proposed reforms may impact school principals. and AR:
More information on RAs to be provided to the FCA.
At present, the information available to the FCA and the public regarding RAs, via the Financial Services Register (the public database of all regulated firms and individuals in the UK), is limited, making more difficult to determine if an RA acts in or outside these activities. for which the director has accepted responsibility and has clearances for. Therefore, FCA proposes to require principals to provide additional information about its RA and their activities, including why the principal is proposing to appoint an RA, the income of the RA, if it will be dealing with clients. details, the number of complaints that concern him (rather than the originator) and what his regulated and unregulated activities involve. This will give FCA significant insight into RA as a business and (equally important) as a source of potential risk. This will apply to existing and new RAs, and significant changes will need to be reported.
In addition, to allow consumers and interested third parties to understand what the RA is authorized to do, the FCA proposes that the registry include details of the regulated activities that the RA carries out.
Increase the responsibilities of school principals for monitoring RA.
Some of the proposed changes clarify and apply existing rules and guidelines. But there are also important new expectations and rules that can (if adopted) dramatically change the landscape of ARR. For convenience, we’ve categorized the proposals based on oversight, risk, annual review, and self-assessment.
New orientations are proposed regarding the “reasonable measures”Which principals should already take to ensure that RAs are acting within their authorizations. New guidelines are also proposed on the level of monitoring and surveillance that the principal should be satisfied with having before it begins or continues with an RA, including guidance on when to review arrangements in light of the growth of an RA’s business. FCA says it has seen many cases of principals unable to cope with significant growth in an RA. Indeed, a new rule is proposed requiring a clause in the contractual agreements between the principal and the RA which will allow the principal to terminate the agreements when he considers that he can no longer adequately supervise the affairs of the RA.
Guidance is also proposed to clarify that principals should supervise RA financial services staff to a comparable level as if they were directly employed by the principal. This should be achieved through, for example, collecting and scrutinizing management information, reviewing RA business activities such as call scripts, regular engagement with RAs through meetings and calls and a clear articulation of issues / concerns that need to be reported. to the director and when.
FCA proposes that constituents be required to assess whether its RAs pose a risk of undue harm to clients, including potentially vulnerable people. If this is the case, school principals will need to act, for example, by strengthening controls or even ending the relationship, before such risks crystallize. This aligns with FCA’s work on the new duty to consumer and around protecting vulnerable retail customers.
Under the rules that exist in certain extreme circumstances (for example, when an AR is no longer suitable because of its ownership), a Principal must take immediate action to terminate or remedy an AR relationship. However, the FCA recognizes that “most problems should be fixable.”So he offers some advice as to when termination may be the appropriate step, to ensure that managers don’t end relationships prematurely and that issues are resolved where possible. An example of this proposed direction is where the RA acts beyond the scope of his appointment.
Annual reviews and principal’s self-assessment
The FCA proposes to require constituents to conduct an annual review of certain aspects of an RA’s activities and the principal’s ability to oversee them. The proposal is that directors will also be required to conduct an annual senior management review of the RA to ensure that they are “fair and appropriate.“RAs are not subject to the Senior Management and Certification Scheme (SMCR), and at present this creates an anomaly in terms of the level of scrutiny applied to initial and continuing fitness and ownership. of RA. This change will partially resolve this anomaly, but can be a burden on managers if done correctly, as continuing competence can be difficult to assess by someone outside the company. The FCA suggests that more frequent reviews may be necessary depending on the principal’s assessment of the risks posed by RA.
FCA also proposes that with respect to each RA, the Principal’s management body should approve a self-assessment document which sets out various key indicators such as: the means by which effective monitoring is carried out, the level of risk of harm that the RA poses and how the Principal is satisfied that the management of the RA is appropriate and appropriate. While the FCA is not proposing that this be filed, it should be made available upon request, and the FCA hopes the compilation process will be a useful exercise for principals.
Representatives appointed by the introducer
Some of these proposed changes will not apply to Introducer Appointed Representatives (RAIs). IARs are only allowed to undertake limited activities: making presentations and distributing financial promotions. FCA recognizes that it would be disproportionate for all aspects of its proposals to apply to these arrangements. For example, the information a Principal has to provide about his RA and the reasons for his appointment are more limited.
Other areas of potential policy change
The FCA has also defined zones of potential future policy change. This includes the potential for regulation or even prohibition of regulatory hosting (arrangements in which the principal does not operate in the same market as its RA, or even in any financial services market). The FCA recognizes that hosting arrangements can have real benefits, including when they act as regulatory incubators for new entrants to the regulated industry. However, the FCA is concerned that such arrangements are disproportionately the source of complaints and the subject of FCA oversight. He attributes this in part to an overly light supervisory approach given the stage and disparate nature of the AR activities supervised. The FCA is also concerned about a tendency to second RAs to the Principals (regulatory hosts in particular) carrying out investment management activities or acting as AIFM with the authorization of the Principals. The FCA is seeking to open a dialogue on how best to regulate in this area. Whatever happens, the FCA is affected by these practices and may feel compelled to act.
Comments and implications
These reform proposals are addressed to school principals. However, RAs should take note of this as well. Not only will the level of control over their businesses increase, but (if these proposals are adopted) there is a real possibility that principals will seek to reduce the risks of their books and terminate some ARs, or at the very least increase fees. that they pay. For school heads, the regulatory burden (and therefore overheads) of complying with these reforms will be considerable. Managers come in all shapes and sizes, and there isn’t necessarily a correlation between size and quality. Nonetheless, it is small organizations that may find it difficult to comply with this increased regulatory burden. RAs and Principals can participate in the consultation, which ends on March 3, 2022.
© 2021 Greenberg Traurig, LLP. All rights reserved. Revue nationale de droit, volume XI, number 347