Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Conduct Regulator Warns Firms About Supervision of Appointed Representatives
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  • UK Conduct Regulator Warns Firms About Supervision of Appointed Representatives
    05/20/2019
    The FCA has published the findings of its review examining how firms in the investment management sector comply with their regulatory obligations in respect of appointed representatives used to carry out activities on their behalf. The FCA has also published a "Dear CEO" letter addressed to the Chief Executive Officers of all FCA-regulated principal firms in the sector, urging them to review their practices in relation to such representatives.

    The FCA's review is relevant to firms engaged in asset management, the promotion and management of alternative investment funds, wealth management, the provision of contracts for difference, and fund advisory and arranging activities. The FCA noted that, in recent years, a number of "Regulatory Host" firms have been established. These firms act as principals to small businesses (which are not FCA-authorized), enabling those businesses to carry out activities ostensibly as appointed representatives, but without necessarily selling the products or services of the principal. In response, the FCA surveyed a range of principals and conducted a review of the financial resources of 33 principal firms to determine whether their capital and liquidity reserves were adequate to cover the risks associated with using appointed representatives.

    The surveys revealed misunderstandings by principals about the business models of appointed representatives and ineffective risk management frameworks, which meant most principals were failing to adequately monitor the activities of their representatives. Conflicts of interest were also identified, with appointed representatives being referred to as "clients" despite the principals holding regulatory responsibility for them. In the contracts for difference sector, third-country entities linked by ownership to appointed representatives were conducting business under the banner of being FCA-authorized despite, in many cases, this not being the case.

    The FCA has taken action in relation to a number of the principal firms exhibiting such practices, including imposing requirements on their regulatory permissions to remove or stop employment of appointed representatives, requesting the de-registration of appointed representatives and commissioning two "skilled persons" reports to assess any harm done to customers and the adequacy of systems and controls.

    In its Dear CEO letter, the FCA highlights its concerns over firms' understanding of their responsibilities for, and control and oversight of, appointed representatives. The letter requires relevant firms to assess whether they are meeting their obligations in respect of appointed representatives in accordance with the FCA Handbook and consider terminating relationships with representatives with whom they do not have adequate risk-management controls.

    View the letter.

    View details of the FCA's review of principal firms and their appointed representatives.

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