Written by Barrie Davey
The future of regulatory hosting platforms looks to be holding steady – for smaller firms, becoming an Appointed Representative (“AR”) of such a platform remains appealing when compared to the cost and complexity of being directly regulated by the Financial Conduct Authority (“FCA”). However, to thrive in the new year, platforms will need to embrace compliance and recognise that regulatory expertise and hosting are integral to each other.
In August, the regulator published Policy Statement 22/11 detailing the changes and improvements to the Appointed Representatives Regime, which came about as a direct result of the collapse of Greensill, a firm that opted to access the UK market as an AR. The changes, which take effect on 8 December 2022, are designed to ensure that principals undertake adequate due diligence before appointing an AR and exercise sufficient on-going control and oversight of their AR’s activities.
To succeed, platforms will need to know everything about their ARs and that proper investment in compliance resources is a must have.
The new requirements on Principals mainly fall into two categories:
1. Information provided to the FCA
Principals are now required to notify the regulator of the AR appointment 30 calendar days prior to the appointment.
Firms currently submit simultaneously the forms for the appointment of the AR and the Approved Persons related to the AR. The FCA have a statutory period of three months for Approved Persons applications and this new requirement will not be in addition to the statutory period.
The Principal must also supply key details in this notification, which 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 and if so, the identity of the group
- 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 the rationale for such
- Whether the AR was previously an AR of a different Principal, and if so, why the previous relationship was terminated
- The financial arrangements between Principal and AR, and whether the AR is paying for regulatory hosting services
- Information about an AR’s financial non-regulated activities – this has been defined broadly and includes, but is not limited to, activities relating to:
- Investment services
- Lending (including consumer credit, mortgages, factoring, financing of commercial transactions)
- Financial leasing
- Money transmission
- Guarantees and commitments
- Foreign exchange
- The issuance of securities and other service of a corporate finance nature custodial, depositary and trust services
- Financial information and data services
- Revenue of the AR from both regulated and financial, non-regulated activities – reported in bands starting at £0 and <100k, £100k and <250k, £250k and <1m, £1m and 10m
Principals have an ongoing obligation to keep this information current. On an annual basis, the Principal will need to certify that the information on ARs is correct as well as revenue and complaints data.
2. Responsibilities of Principals
The FCA has set forth detailed expectations with regards to a Principal’s responsibilities appointing and monitoring an AR:
At a minimum, the Principal’s contract with the AR:
- Require the AR to cooperate with the FCA
- Require the AR to provide the Principal’s auditor sufficient access
- Require the AR to provide the Principal with sufficient information as is necessary for the firm to comply with its FCA obligations
- Should specify the limits of the AR’s activities and scope of their appointment
- Should have the ability to terminate the contract if the Principal concludes that there are unresolved issues, unusually high rates of senior management turnover or other issues
- Require the Principal the ability to terminate the AR if the firm determines that it no longer able to effectively oversee the activities of the AR
The Principal should be clear on the circumstances when it is likely to be appropriate to terminate an AR relationship. For example, where the AR is unwilling or unable to resolve identified issues or where an ARs is misleading clients. The Principal should take reasonable steps to assist ARs with an orderly wind down where this is necessary. To terminate an AR, the Principal must complete the relevant terminate AR form in Connect.
Assessment of the AR
Before a Principal appoints an AR, the firm must establish on reasonable grounds that:
- The Principal has adequate resources to monitor and enforce the FCA’s rules on the AR
- The Principal has adequate resources and is ready and organised to comply with the FCA’s rules under the AR Regime
- The AR’s activities do not present an undue risk to consumers or market integrity
- The AR is financially solvent
- The fitness and propriety, experience, competence and capability of all individuals representing the AR
Adequate Controls to Supervise ARs
The Principal must have adequate controls to effectively supervise its ARs, taking into account the size of the AR and the nature of activities undertaken by the AR.
These controls should:
- Enable the firm to effectively manage conflicts of interest
- Allow the firm to maintain effective oversight of the AR
- Enable the firm to identify and remediate any issues arising at the AR
- Enable the firm to maintain a level of oversight over the AR’s regulated activities as if all individuals engaged in those activities were employees of the firm
In addition, the Principal should consider whether the appointment of the AR presents a risk of undue harm by assessing the nature of the risks associated with the appointment. This assessment should consider:
- The AR’s business model
- Its senior management and governance arrangements
- The likely impact on clients or potential clients
- The likely impact on business continuity
- The potential for reputation damage
- The ability of the Principal’s own arrangements to effectively identify and manage those risks
Annual Review of ARs
Principal firms must conduct a review of each of its ARs at least annually. This includes:
- The fitness and propriety of senior management at the AR and in particular, their ability to carry out the regulated activities for which the firm has accepted responsibility
- The AR’s financial position
- The adequacy of the Principal’s controls and resources to effectively oversee the AR
Annual Review of Principal
Principal firms must prepare a documented self-assessment focusing on how the Principal is meeting its responsibilities and identify any material deficiencies or concerns. It should be a single document designed to identify risks and gaps in compliance and reviewed and signed off by the governing body at least every 12 months.
We have been hosting ARs at RQC Group since 2011 and we have been advising other platforms as regulatory compliance consultants. Our unique expertise in both areas allows us to host ARs with a sufficiently hands-on approach that remains both pragmatic and commercial. We also offer hosting for investment managers under a secondment arrangement.