Written by Robert Quinn
Founder & CEO
Today is the deadline to comment on the FCA’s Consultation Paper (“CP”) and HM Treasury’s Call for Evidence (“CfE”) on the Appointed Representative regime. What is very apparent is that regulatory hosting platforms (“platforms”) will have to lift their game if they want to thrive in an environment with exponentially more regulatory scrutiny.
Stand up and be counted
The FCA will require a new Part 4a permission for platforms and have set up a new department specifically to supervise the estimated 40,000 Appointed Representatives (“ARs”) hosted by 3,600 principal firms. Firms wishing to host ARs will have to declare their business model to the FCA and the regulator’s increased scrutiny is clearly holding principals’ feet to the fire – they claim 65% of applications for new principals have either withdrawn or have had their applications refused (source: FCA CP 21-34).
What makes you fit and proper?
Like assessments on senior managers, principal firms will be certifying their fitness and propriety every time they host a new AR. The CP proposes several new notifications designed to support scrutiny of principals and supervision of ARs:
- Formal 60-day notification for appointing new ARs
- Rationale for appointment
- Nature of regulated activities permitted and whether a secondment is in place
- Revenue from regulated and unregulated activities
- Nature of financial arrangement between principal and AR
- Notification of changes
- Ongoing reporting on complaints and revenue
When appointing a new AR, platforms need to ensure that appropriate due diligence has been undertaken on the AR and a comprehensive risk assessment has been approved by senior management. Be prepared for questions, including: Does the principal have expertise in this area? Do they have sufficient resources to supervise the AR’s activities? Have the conflicts of interest been identified and managed?
To demonstrate effective supervision that meets the FCA’s expectations, platforms need compliance staff who understand the rules and can apply it to the AR’s business. Platforms that will thrive will be those that have invested in full time staff experienced in onboarding ARs quickly, that have the resources to proactively monitor their business and have the technology to identify when a matter might require closer inspection. An effective compliance programme is a living framework designed to ingest regulatory change and identify issues that require controls to be amended promptly. Good compliance support is expensive, but significantly cheaper than the cost of a ‘section 166 investigation’, which is where the FCA requires an independent review of a firm’s activities and where the costs of the review are borne by the firm itself.
Tag team effort – Bring on SMCR
Many of the proposals are about the principal’s obligations, but platforms need help too. Both the FCA and HM Treasury have questioned whether the Senior Managers & Certification Regime (“SMCR”) should be extended to the AR regime. We believe ‘absolutely yes’ – every AR should be required to have a designated senior manager function that is responsible for timely, accurate and comprehensive reporting to the principal. SMCR was introduced because the Approved Persons regime was discredited and outdated. These robust standards of conduct should be introduced across the industry regardless of whether a firm is directly or indirectly authorised.
In the wholesale sector, regulatory hosting is a vital bridge to foster competition and innovation in the UK. ARs can efficiently outsource areas outside of their expertise and focus on growing their business. European platforms can effectively delegate investment management to UK firms. It is a cost-effective way to help global firms quickly create a UK footprint, but platforms must properly invest in their infrastructure to tap into this growing market.
As compliance consulting experts, we understand the benefits that a strong partnership with a regulatory hosting provider brings to a firm’s operations, and the importance of complying with the FCAs requirements in delivering this service to our clients.