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Article
Clarity for principal firms on new AR oversight rules
By:
Philip Tregurtha
19 Sep 20246 min read
The FCA recently published its findings on how principal firms are embedding the new rules for overseeing their appointed representatives (ARs). Phil Tregurtha sets out the regulator’s five core requirements and good-practice examples for how to improve compliance.
Contents
After setting higher expectations for principal firms in December 2022, the FCA tested the implementation of its new rules by surveying around 250 firms and randomly selecting 23 for an in-depth assessment. The regulator shared its findings in September 2024. It found that, although most firms had made efforts to demonstrate compliance with the enhanced requirements, the FCA observed “some overconfidence in how well firms are implementing the rules”. This indicates that the results of the new rules may not have been as positive as anticipated.
We've observed, however, that in response to heightened regulatory scrutiny on AR oversight, many firms are re-evaluating their risk exposure associated with appointed representatives and scaling back AR populations. As well as decreasing innovation – which the use of ARs are known to help drive – this may result in a decline in focus on the new rules. This may impact overall compliance with, and effectiveness of, the regulations.
With more effort needed for principals to fully demonstrate their commitment to effective and compliant AR oversight, the FCA has provided some much-needed clarity in its review – highlighting five core requirements, and providing examples of good practice and areas for improvement.
Carefully onboarding appointed representatives
A principal firm must carry out adequate checks and due diligence before onboarding ARs, verifying that the firm is financially stable and that the relevant staff are competent.
In doing so, firms are encouraged to maintain clear, documented onboarding procedures and provide training to ARs related to their business. Relying solely on automated checks when onboarding ARs isn't considered sufficient. Nor is failing to consider the impact that appointing an AR will have on the principal’s financial and non-financial resources.
Clear self-assessments
A principal firm should have a written record detailing compliance with its obligations, identifying any concerns and outlining steps to address them. (In many ways, this is similar to the Consumer Duty annual board report requirement). While 83% of firms within the in-depth assessment sample had completed their self-assessments, the FCA considered only 52% of these assessments to be of good quality.
Examples of good practice with this requirement:
Having a clear, single document that identifies material deficiencies and contains an action plan to address concerns
Using a red-amber-green rating system to identify gaps in compliance
Discussing the required document at board level where it should be signed off every 12 months
Examples of poor practice:
Using a tick-box approach
Failure to document actions to address any deficiencies
Following an insufficient template that didn't cover all self-assessment requirements
Evidence-driven annual reviews
A principal firm is responsible for reviewing their appointed representatives’ business activities at least every 12 months. Completion of these is seen as critical for principals to demonstrate adequate oversight. The FCA found that 82% of firms within the in-depth assessment sample had completed annual reviews of their ARs but considered only 43% of these reviews to be of good quality.
Examples of good practice with this requirement:
Having a strong understanding of ARs’ business models and including a comprehensive analysis of the AR’s activity (including quality assurance checks on client files or customer satisfaction surveys) in annual reviews
Embedding Consumer Duty compliance into the review – considering fair value assessments and distribution strategy, for example
Bringing issues identified as part of ongoing monitoring of the AR into the scope of the review
Examples of poor practice:
Where a principal relied on limited information
Where there was a lack of evidence to substantiate conclusions in reviews
Where review templates did not cover all necessary requirements
Where issues were not escalated for consideration by the governing body
Monitoring, oversight and acting out of scope
A principal firm should establish that their appointed representatives are fit and proper, comply with the relevant rules, and operate within the scope of their appointment.
Examples of good practice with this requirement:
Proactive monthly monitoring
In-person visits to ARs
Reviewing all new financial promotions
Setting alerts when AR websites are updated
Boards should be discussing AR oversight and making use of management information to identify any AR-related risks. Poor practice was where a firm lacked sufficient resources to be able to effectively monitor ARs, check consumer-facing materials, or observe interactions between ARs and customers.
Termination and offboarding
A principal firm should anticipate the need to terminate an appointed representative relationship and take all reasonable steps to ensure an orderly winding-down of any relevant business. They need to consider how terminating the AR relationship may impact the customers of the AR and how to manage this. This is particularly important in the context of operational resilience (if the AR is critical or important to the principal’s business model), as well as the Consumer Duty (which requires firms to "avoid foreseeable harm").
Examples of good practice with this requirement:
Having a clear termination policy – outlining the steps to terminate an AR and what conditions may result in this
Checking the AR’s website after termination to make sure it no longer states that it can undertake activities on behalf of the principal
Monitoring the size of the AR and any changes in its business model to determine whether it can continue to effectively service its customers
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The FCA encourages principal firms to read and consider these findings when assessing their own obligations, ensuring that they act off the back of this review. As the FCA will sharpen its focus on self-assessments, annual reviews and AR oversight in future, we encourage principals to invest time and effort into getting this right.
The regulator’s guidance is only the starting point, however.
To truly meet FCA expectations, the challenge for principal firms lies in how well they can integrate wider regulatory frameworks, particularly Consumer Duty, into their oversight of AR distribution chains. By doing so, firms can prove that appointed representatives are not only compliant but are committed to delivering good customer outcomes.
