NACFB: Standing on principle

Standing on principle

Implications of proposed improvements to the Appointed Representatives regime

James Hinch Head of Compliance NACFB

According to HM Treasury, today there are around 40,000 Appointed Representatives (ARs) operating under around 3,600 principal firms. Most readers will know that an AR is a person or firm who carries out regulated activity without being directly authorised. Instead, authorisation rests with a ‘principal’ firm which accepts responsibility for the regulated activities undertaken by the AR.

The AR regime has been a part of the financial services landscape for a long time. It was originally established in the 1980s for investment services activity but since the introduction of the Financial Services and Markets Act 2000, it has been adapted and applied to a much wider range of activities including networks.

It appears that it is now time for these adaptations and applications to be tested, the trigger being a Treasury Select Committee (TSC) report which found that the AR regime might be being used “for purposes which are well beyond those for which is was originally designed.” Consequently, the TSC asked that the Financial Conduct Authority (FCA) and HM Treasury consider reforms to the regime which might limit its scope and reduce opportunities for the regime to be abused.

So, at the end of last year, in parallel, both the FCA and HM Treasury published consultations. Each takes a slightly different angle:

• The FCA’s “CP21/34: Improving the Appointed Representatives regime” consults on further rule changes it can make to improve principal oversight.

• HM Treasury’s “The Appointed Representatives regime: Call for Evidence” seeks to gather information on how market participants use the regime, how effectively it works in practice, as well as potential challenges to the safe operation of the regime, and possible reforms.

Having reviewed the FCA’s consultation, I want to share how some of the proposed changes may impact NACFB Members who are either principal firms or ARs.

The FCA will require principal firms to provide more information on their ARs and prospective ARs including business model, revenue, and complaints data. Whilst most principles will (or should) already have a solid understanding of this information, most may not have been collecting it as part of their periodic AR reviews. For the principle, this will take more time, cost more money, and require extra resource to carry out.

It does, however, seem that the FCA has listened to the market when it comes to a simplification of the rules. Proposed new guidance is recommended on how to meet the FCA expectations in a practical way. This includes assessing the senior management within AR firms for how well they align with fitness and propriety and taking reasonable steps to ensure ARs act within the scope of their appointment. The detail is yet to be disclosed but the signs are encouraging that the regulator is providing such steps for firms to follow. Furthermore, the regulator is proposing further clarification of the definition of ‘adequate’ in relation to a principal’s controls, resources, and assessments.

While the proposed changes are relatively small in their nature, with every change comes impact and some firms – both principals and ARs – will notice the impact of these changes more than others.

Holistically the proposed changes may have some longer and larger consequences for principal firms and the AR framework. It’s not hard to work out that complying with the new rules and guidelines will increase principal firms’ operational costs. How they are accommodated, is another matter. It is likely that principals will either raise client fees/charges, or reduce the number of ARs in their network.

Add into the mix, the recent introduction of AR and Introducer Appointed Representative (IAR) fees for principal firms, and we predict that most will choose to remove ARs from their networks.

Interestingly, it seems from the consultation that this is exactly what the regulator is attempting to achieve – to see a reduction in the volumes of ARs in the market, leaving a smaller but arguably higher-calibre pool who pose less risk to the consumer.

At a recent NACFB Members’ Advisory Group (MAG) meeting, attendees discussed the proposed changes and their likely impact. There was consensus that the changes would strengthen behaviours within the AR framework. However, it was agreed that the regulator also runs the risk of reducing both competition in the market and consumers’ choice of whole of market options.

The FCA’s consultation is open to comments until 3rd March 2022 and the NACFB will be submitting a response. We will of course keep you abreast of developments. Similarly, HM Treasury’s consultation closes on the same day, and I will provide an overview of its proposals in a future issue of this magazine. In the meantime, if you have strong views on the AR regime, I urge you to read and participate in each consultation.

The regulator also runs the risk of reducing both competition in the market and consumers’ choice of whole of market options