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The Appointed Representatives regime – principals under scrutiny

Posted on 20 December 2021

On 3 December 2021 the FCA published consultation paper CP21/34 outlining proposed changes to the UK's appointed representatives (AR) regime (the consultation). The consultation was published alongside a Call for Evidence issued by HM Treasury, seeking input on how market participants use the AR regime; how effectively the regime works in practice; potential challenges to the safe operation of the regime; and possible future reforms.

The AR regime allows firms to carry on certain regulated activities without being directly authorised by the FCA. Instead, an AR carries on regulated activity under the responsibility of an existing authorised firm (the principal). Over time, the regime has evolved to include regulatory hosting platforms and networks, secondment arrangements to facilitate discretionary investment management and alternative investment fund manager-hosting platforms.

The FCA is concerned that the current use of the regime, and its prevalence in the financial services space, is leading to significant consumer harm. While the FCA notes the benefits of the regime and the fact some ARs are fostering innovation by using it to test products and services, other firms appear to be using the regime on a longer term basis as an alternative to direct authorisation and a way to evade FCA scrutiny.

The overarching objective of the proposed changes to the AR regime is to reduce potential harm to consumers and markets arising from a lack of control and oversight by principals over ARs. To tackle this, the FCA has selected two main areas of change: information and notification requirements on principals, and strengthening responsibilities and expectations of principals. Proposals include increasing information and reporting requirements on principals, providing more detailed information in relation to an AR's activities on the Financial Services Register and imposing a lead time of at least 60 calendar days before the AR appointment takes effect.

Other potential areas for further change focussed on regulatory hosting platforms, small principals unable to properly oversee their larger ARs, and the risks arising from overseas ARs. Proposals to mitigate the harm arising from these business models range from an outright ban of regulatory hosting services, to imposing size limits and requiring specific regulatory consents.

While the consultation is aimed at principal firms, there inevitably will be consequences for the ARs themselves. No matter the outcome of the consultation, there is likely to be increased lead times for AR onboarding, increased scrutiny of business plans and operations, and increased costs of doing business.

The consultation closes on 3 March 2022 and we await both the sector's reaction to these proposed changes and increasing regulation of the AR regime.

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