In September 2023, the FCA published data from its 2021 and 2022 data requests sent to principal firms and outlined how they are on improving the appointed representative's (ARs) regime through greater use of data and what they expect from firms.
What is an appointed representative (AR)?
An AR is effectively ‘renting’ the principal firm’s permissions and is restricted to only those regulated activities that the principal is authorised to carry out. The principal firm accepts responsibility for monitoring the AR.
What are the main failures highlighted by the FCA of principal firms' oversight of ARs?
Due diligence failures
Data collected by the FCA shows that the majority of principals have established due diligence checks when recruiting new ARs and are completing ongoing checks. However, failures were noted in not repeating due diligence checks relating to ongoing suitability, financial resilience, or criminal records checks.
The responsibility for making sure that the AR is fit and proper, and that they comply with the FCA rules and operate within the scope of their appointment falls on the principal. The FCA sees frequent examples among the outlier firms with weak AR recruitment arrangements. This includes poorly completed applications and insufficient detail being provided on reference checks, competency assessments, conflicts management and rationale for appointment in view of adverse information disclosed. Where the FCA has seen significant issues, principal firms have agreed to stop recruiting ARs until these issues are addressed.
Dedicated resources for overseeing AR activities
When the FCA review principal firms, they look for reassurances that principals oversee their ARs adequately. The FCA has found examples where this is clearly not the case. The FCA has seen principals with no clear process or structured plans for how they oversee their ARs or where monitoring activities are not carried out in sufficient depth, if at all. In these cases, the FCA has required these principal firms to take a range of actions to address the FCA’s concerns, including implementing stronger systems and controls and stopping AR recruitment.
It was noted that 70% of principals had at least one full-time equivalent (FTE) employee performing direct oversight for every 5 ARs in their network1. However, there were some outliers that reported even lower levels of principal oversight, and the FCA have challenged these principal firms on whether they can effectively perform their functions with limited resources.
Dormant AR relationship
The FCA noted that some principals reported that their ARs generate no revenue from regulated activity, indicating they may be dormant ARs. Where an AR has not carried out regulated activity for some time, its principal should consider whether the AR relationship remains appropriate. If it appears the AR is carrying out no regulated activity, its’ principal should consider terminating the relationship if appropriate. This is seen to reduce the risk of ARs taking advantage of the potential ‘halo effect’ of being listed on the Financial Services Register purely to promote risky unregulated activities.
How can Newgate Compliance help?
Ocorian’s subsidiary, Newgate Compliance, can assist principal firms in implementing systems and controls to effectively oversee its AR arrangements from onboarding due diligence to ongoing monitoring and review through the use of its technology compliance solution, the Gateway.
Aldgate Advisers Limited (Aldgate) is a sister company of Newgate Compliance and is staffed by the same team of ex-regulators. Aldgate acts as the principal and is authorised and regulated by the FCA and can provide AR coverage to certain firms. Our solution allows you to go to market quickly under their regulatory umbrella acting as a principal firm you can rely on.
Newgate Compliance can also support firms through the process of submitting a successful direct authorisation application.
Keen to learn more about the FCA authorisation routes?
If you would like to learn more about the FCA authorisation routes available to asset managers, take a look at our recent insightful discussion with regulatory industry experts ‘The rent vs. buy approach for asset managers seeking FCA authorisation’.
About the authors | Meet our compliance experts
Matthew joined Newgate Compliance from inception in May 2014 as Director of Consulting. He has over 20 years of regulatory experience at the UK regulator and other further compliance consulting roles in the UK.
As a regulator, Matthew performed a variety of roles and gained a specialism in regulatory transactions where he was responsible for assessing and making recommendations on applications for corporate authorisation and individual approval. On the corporate side, Matthew dealt with applications from a wide range of market sectors including asset managers; brokerage firms; corporate finance advisers; large and complex insurance companies; e-money issuers and mortgage lenders. On the individual side, Matthew was a member of interview panels charged with assessing the fitness and propriety of key individuals applying to carry out senior management positions in the UK's largest financial institutions.
Matthew’s role at Newgate has been focused on assisting clients in the investment sector to implement their three lines of defence compliance model utilising Newgate’s Gateway compliance solution. As part of his tenure at Newgate, Matthew has played a key role in preparing clients for regulatory change and deploying Newgate’s suite of products to help meet their obligations including AIFMD, GDPR, MIFID, SMCR, IFPR and most recently the Consumer Duty.
Andrew Coffey, Junior Consultant – Newgate Compliance
Andrew Coffey joined Newgate in April 2022 and is part of Newgate’s appointed representative hosting business (Aldgate), handling the onboarding of newly appointed representatives (ARs) under the Aldgate umbrella, monitoring Aldgate’s ARs and ensuring that Aldgate fulfils the expectations the FCA places on Principle firms. Andrew also assists the Newgate team in the annual updating of the Newgate Training suite to assist firms in being in line with their regulatory obligation