UK Conduct Regulator Consults on Improvements to Appointed Representatives Regime12/03/2021The U.K. Financial Conduct Authority has published a consultation paper on proposed improvements to the Appointed Representatives regime. The AR regime allows authorized firms to appoint third parties to conduct certain regulated activities on their behalf. The FCA has identified shortcomings in principals' use of the regime, including a lack of proper oversight over ARs and poor controls over the regulated activities for which ARs had accepted responsibility. The collapse of Greensill Capital (UK) Limited in 2021 highlighted some of these issues, as one of Greensill's subsidiaries had acted as an appointed representative for another firm and its business had arguably grown to be far more substantial than was intended under the AR regime.
The consultation paper proposes the following improvements to the regime:
- Requiring principals to provide additional information on ARs to the FCA, including the nature of the regulated business that they will conduct, and to notify the FCA at least 60 calendar days before the appointment of the AR takes effect. The nature of the AR's regulated activity will then be included on the Financial Services Register.
- Clarifying and strengthening the responsibilities and expectations of principals. Principals will be expected to conduct "enhanced monitoring" of the delegated function, although the FCA does not specify what this monitoring will amount to. They will also be obliged to oversee ARs effectively, which will include annually reviewing the AR's controls and resources and ensuring that the activities that the AR conducts do not result in undue risk to consumers or the market.
The consultation paper also seeks views on the risks posed by "regulatory hosting", whereby a regulated firm oversees the use of its permissions by ARs which typically operate independent, unconnected businesses. In this case, the ARs may not actually have any relationship with products or services offered by the regulatory host. There is some concern that this model leads to inadequate oversight by the principal and a lack of understanding of the market in which the AR operates. The FCA is not proposing rule changes on regulatory hosting at this stage, but is gathering information on the issue with a view to potential policy changes in the future. Possible options include prohibiting the use of regulatory hosting
services, limiting the size of ARs or limiting the scope of regulated activities that regulatory hosts can oversee.
HM Treasury has also published a consultation paper seeking information on how market participants use the AR regime and how effective it is in practice. Responses to the consultation will inform HM Treasury's view on whether legislative changes to the AR regime may be necessary in addition to the changes to the FCA's rules and guidance.
Responses to the consultation should be submitted by March 3, 2022.
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