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NACFB: The right representation
Appointing the right representation
Ensuring the apple doesn’t fall too far from the tree
Dean Williams ComplianceOfficer NACFB
Back in February, the Financial Conduct Authority (FCA) wrote to all regulated firms confirming the key risks identified within different sectors of financial services subject to regulatory oversight. In relation to credit broking, the FCA highlighted a key emerging risk of firms having poor oversight of their staff and/or Appointed Representatives (ARs).
This article seeks to clarify the concerns the FCA has relating to ARs and should act as a prompt for principals to review their existing systems and controls, ensuring they are appropriate and meet FCA requirements.
FCA concerns
The regulator underlined a lack of oversight by a principal of their ARs highlighting how some sales practices are going unchecked. This potentially increases the risk of misselling, fraud, or other poor consumer outcomes.
The role of the principal
The AR is appointed by a principal. Both parties must enter a written contract to this effect. The contract must contain certain required terms as required by the regulations.
Acting as a firm’s principal places a considerable burden on the role in terms of costs and time, this burden only increases as more ARs are added. For some authorised firms, this can make them reluctant to take on ARs, with concerns often concentrating on the strict requirements to take responsibility for the AR’s actions, alongside the potential detrimental impact on the principal’s reputation in the event that the AR acts negligently or outside their remit.
Principal obligations
Prior to entering the contract, the principal is obliged by FCA rules to ensure that any AR is fit and proper to deal with customers in their name and that clients dealing with a principal’s AR are afforded the same level of protection as if they had dealt with the principal directly. Simply, this is because the principal is responsible to the same extent as if they themselves had expressly permitted an action. The principal therefore assumes responsibility for anything the AR does – or omits to do – in carrying out the process of placing a deal. “ The regulator underlined a lack of oversight by a principal of their ARs highlighting how some sales practices are going unchecked
The principal must therefore establish on reasonable grounds that:
The appointment does not prevent the principal from satisfying and continuing to satisfy its own threshold conditions;
• The AR is solvent, is otherwise suitable to act for the principal and has no close links which would prevent them from being effectivelysupervisedbytheprincipal;
They have adequate control over the AR’s regulated activities for which the principal is responsible;
The principal has the resources to monitor and enforce compliance by the AR;
SUP12intheFCAHandbookprovidesfurtherclarificationas to how a principal can determine the solvency and suitability of a proposed AR;
The AR is ready and organised to comply with other applicable requirements in SUP 12.
Continuing obligations
During the AR appointment, the principal will be responsible for the acts and omissions of the AR at senior management level, continued monitoring of the AR’s suitability, and financial checks. It is imperative that the principal ensures the AR does not hold client money and obtains approval of an AR’s staff under the approved persons regime.
It is the principal’s responsibility to further ensure that the AR satisfies the FCA’s training and competence requirements, whilst monitoring the AR’s compliance within the terms of the aforementioned AR agreement.
The onus is therefore on a firm’s principal to keep record of its AR structure, including oversight of any multiple principal arrangements. The principal is obliged to notify the FCA of certain events, such as the termination of the AR’s appointment or any change in information or conditions of appointment or any approved person ceasing to perform a controlled function.
An AR can have more than one principal, albeit that certain activities prohibit multiple principals, for example any designated business for retail clients. If a principal appoints an AR which is already an AR for another firm, the principal must enter into a written agreement, a multiple principal agreement, with every other principal the AR may have. Again, the multiple principal agreement must contain certain required terms set out in the FCA’s supervision manual.
Increasing scrutiny
Principal and AR dynamics remain an area of focus for the FCA. The NACFB encourages all Member firms to review their existing arrangements and consider if they remain fit for purpose. As the saying goes, one bad apple spoils the barrel, so if you currently have ARs appointed, can you confidently say that each and every one of them is providing services to customers which meet both your own and the FCA’s requirements?
The NACFB can provide guidance and support to ensure all firms with an AR network are operating compliantly, treating customers fairly always and are able to evidence best practice.
