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 reevaluating 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.
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.
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:
Examples of poor practice:
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:
Examples of poor practice:
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:
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.
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:
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.
For more insight and guidance on your AR oversight arrangements, get in touch with Blandine Arzur-Kean, Phil Tregurtha or Clara Whitaker.
