UK Conduct Regulator Publishes Policy Statement on Improvements to Appointed Representatives Regime

The U.K. Financial Conduct Authority has published a Policy Statement and final rules on improvements to the Appointed Representatives regime. The AR regime allows authorized firms to appoint representatives to conduct certain regulated activities on their behalf. The FCA consulted on proposed changes to the regime in December 2021. The changes will take effect from December 8, 2022, although there is a transitional period for some of the rules (e.g., those relating to on-going submission of information and annual self-assessments), giving firms longer to comply. Principal firms will be required to provide data on their existing ARs within 60 days of the rules coming into force – the FCA will be sending out section 165 requests for information towards the end of 2022.

The improvements to the regime, including some amendments to the rules as consulted on, are as follows:
 

• Principals will be required to provide to the FCA additional information about the business conducted by their ARs. Firms will have to provide information about the nature of the regulated business that the AR will conduct, as well as financial non-regulated business (but not non-financial non-regulated business). Firms will also have to notify the FCA at least 30 calendar days before the appointment of an AR takes effect (substantially shorter than the original proposed pre-notification deadline of 60 days). The FCA has abandoned its plan to include further information on the AR's regulated activity on the Financial Services Register at this time, out of concern that this might hinder the usefulness of the Register. However, it does plan to make some clarificatory changes to the information about ARs that is currently listed on the Register.
• The FCA has confirmed its proposal to publish additional rules and guidance on its expectations of principals and their responsibilities. Under the new guidance, principals will be expected to ensure that arrangements with ARs do not present a conflict of interest and that enhanced monitoring is applied to the delegated task or function. The FCA guidance does not describe what "enhanced monitoring" will amount to. The FCA Handbook rules will also be amended in places, including to specify that the principals' activities should not result in undue risk of harm to consumers or market integrity. The new rules will also require principals annually to assess the fitness and propriety and competency and capability of individuals at ARs.

The FCA also sought input 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. This model has been used for many kinds of new or smaller businesses, including in the FinTech sector where a principal firm allows an unauthorized FinTech to trial a new regulated services without incurring the authorization costs (also known as a regulatory incubator service).  The FCA is proceeding with its proposal to require principals that intend to offer regulatory hosting to provide advance notification (60 days). No other requirements relating to regulatory are being introduced at this time, and the FCA will publish its response to the feedback it received on this point in 2023.
 
HM Treasury also published a consultation paper in December 2021, seeking information on how market participants use the AR regime and how effective it is in practice. The consultation closed in March 2022 and HM Treasury has not yet published its conclusions from the consultation. However, the consultation will ultimately 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.

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