At a Glance
- The Financial Conduct Authority (“FCA”) continues to place strong focus on ensuring products and services are delivering fair outcomes for consumers. More recently, the FCA’s 2022/23 business plan noted the role of Appointed Representatives (“ARs”) were on the FCA’s radar, recognising a range of harm across all sectors where firms have ARs. The FCA states that this is often because firms do not do enough due diligence prior to appointing an AR or, operate insufficient monitoring and oversight once ARs have been appointed.
- The FCA launched a consultation paper, CP21/34: Improving the Appointed Representatives regime (“CP21/34”), in, in December 2021 to propose updating the AR regime to seek to clarify and strengthen the responsibilities and expectations of Principals by improving the oversight of their ARs and requiring Principals to provide additional and more timely information on their ARs. HM Treasury also published a call for evidence on how market participants use the AR regime and how effectively the regime works in practice. Both consultations closed on 3 March 2022. We are anticipating final rules to be published imminently, and we would expect all impacted firms to have considered the CP21/34 and identified areas where they may fall short of the expectations of the proposals, planning how they might address any gaps, specifically in their management information (“MI”) systems and supervision and oversight frameworks.
- Given the clear focus of the regulator on ARs and the information that Principals will need to report under the finalised rules, it is important that firms have reviewed the robustness of their supervision and oversight framework, including their readiness to obtain sufficient data and information required by both these proposals and the requirements set out within the Consumer Duty (“the Duty”).
Target Audience: Firms who currently have Appointed Representatives or Tied Agents, intend to have ARs or Tied Agents in the future, and ARs or Tied Agents themselves.
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The AR regime was put in place to allow regulated activities to be undertaken by financial advisers without the need to be authorised directly with the FCA. The updated AR regime aims to strengthen Principals' oversight of ARs and improve the information it receives by reducing potential harm to consumers and ensuring that good customer and market outcomes are achieved. The FCA expect final rules to be published imminently.
CP21/34 builds on previous thematic reviews conducted by the FCA across the insurance and investment sectors in 2018 and 2019. Significant shortcomings were identified in a Principal’s understanding of their regulatory obligations in relation to their ARs, with controls related to regulatory activities of ARs for which a Principal has accepted responsibility being categorised as “inadequate”. With the recent call for evidence on how market participants use the AR regime and how effectively the regime works in practice by the HM Treasury, the consultation paper points to how the FCA continue to work with HM Treasury on possible legislative changes to the AR regime.
It is no surprise therefore, that the recent FCA Business Plan 2022/23 outlined one of the FCA’s key activities being to undertake more “assertive” supervision of “high-risk” Principals, including using appropriate enforcement where required. Furthermore, the FCA found that Principals and ARs result in significantly more issues compared to directly authorised firms, with “Principal firms using ARs generate 50 to 400% more complaints and supervisory cases”. The reduction and prevention of such harm is a key focus of the regulator in the coming months, and complaints data will be a key tool the FCA will use to measure the success of Principals’ monitoring, oversight, and management of ARs.
Ultimately, the FCA want to ensure consumers are better informed through access to improved and quality information on Principals and ARs in order to make good decisions when choosing products or services that best suit consumers’ needs.
Key areas of Focus – Expected Progress by Firms
At a minimum, we expect firms to have conducted a gap analysis/current state assessment against the draft rule proposals to determine:
- What current processes, procedures, and controls will support the firm in meeting the potential requirements of the AR regime proposals; and
- Any gaps in processes, procedures, and controls that will be essential for the firm in meeting the potential requirements of the proposals.
Following this current state assessment, firms should have identified actions and developed detailed implementation plans, focussing and prioritising areas the gaps identified that require the most time and resource. To date, the biggest challenge we have seen firms experience in preparation for the new rules is the reporting of new data items, such as, but not limited to, non-regulated activities an AR carries out and the estimated revenue from both regulated and non-regulated activity of ARs (in the first year). This is primarily for two reasons:
- Firms do not currently obtain or collate from ARs some of the data requirements the proposed updates to the AR regime require; and/or
- The current systems firms use for FCA reporting may not currently have the functionality to gather the data items that may be required by the proposed updates to the AR regime.
We have highlighted below potential key challenges firms should have been considering following the publication of the CP21/34 proposals. This is not an extensive list but seeks to highlight some of the key activities we expect firms to have underway since the publication of these proposals and ahead of the final AR regime rules being published.
1. Principals to provide more information on ARs to regulator
Whilst the FCA already expects firms to have sufficient information and knowledge of the business of their ARs, under the updated proposals to the AR regime, firms will be required to provide additional details on this business. Currently, the information that Principals are required to report to the FCA is deemed limited, with the regulator requiring only high-level information as to the market the AR operates in.
Going forward, Principals will need to provide information on the type of business an AR will conduct, both when appointed and, on an ongoing basis. If the nature of the AR’s details changes at any time, the FCA will expect firms to collate and provide this at least 60 calendar days for existing ARs after the rules come into force, 10 calendar days before the change takes effect for ad hoc reporting, and 60 calendar days before new AR appointments.
This additional information will enable the FCA to better identify potential risks, but these proposals will create further complexities for a Principal’s current mechanism for capturing and reporting information on their ARs. In addition to ensuring a Firm has notified the FCA of any significant changes in information they have on their ARs, it is likely firms do not currently capture some of the updated information required by the CP21/34 proposals. For example, firms are unlikely to be providing revenue data for each of their ARs from both regulated and non-regulated activities, nor collating information that describes the non-regulated activity that the AR may conduct.
However, this is not an exhaustive list and so firms should have reviewed and assessed the firm’s mechanism(s) for capturing and reporting AR information, identifying gaps a firm may have in MI against the information that may be required under the AR regime proposals. We would expect this to include an analysis of current timeliness of reporting of data versus the ability of a firm to report data in line with the updated proposals.
2. Improved Oversight of ARs
One of the key drivers of harm identified by the regulator is the lack of appropriate oversight of ARs by Principal firms. The FCA want to better identify problematic ARs and ascertain potential weaknesses in supervision of these ARs. Firms should therefore have reviewed and assessed their oversight arrangements, ensuring systems are in place to anticipate oversight of ARs to a “comparable standard” of any individual directly employed by a firm and that controls effectively mitigate the risk of AR’s activities resulting in undue risk to consumers and/or market integrity.
Firms should have begun to focus their activity in this regard on the design adequacy and operational effectiveness of a firm’s on-going oversight arrangements of Principals and their ARs, which should include but is not limited to, assessing the suitability of a firm’s target operating model to meet the requirement of a firm to have sufficient resources to operate adequate controls and oversight.
Firms currently provide complaints data to the FCA in aggregation, logged against the Principal. Under the new proposals, Principals will need to submit complaints data at the individual AR level. Firms should be reviewing and assessing their complaints handling process, procedures, and current reporting arrangements to ensure identification of issues leading to potential or actual harm are addressed by the firm more quickly. Additionally, firms should assess the proactivity of a Principal to prevent and mitigate potential harm from their ARs.
Principals will also need submit complaints data on their ARs on an on-going basis, with current proposals stating this should be within 30 business days of the end of the relevant reporting period.
This is further supported by the proposals under the Consumer Duty, where the FCA expects firms to identify and manage any risks to good outcomes for consumers by proactively spotting where consumers are getting poor outcomes in addition to understanding the root cause of any issues. Furthermore, the FCA’s Business Plan 2022/23 includes improving oversight of ARs as one of their outcomes, with the FCAs’ measurement of progress currently stated as being through a reduction over time in volume of complaints for Principal firms versus non-Principals, specifically “per £1m of revenue from regulated activities”.
Firms should review if they have sufficient processes in place to adapt and change products/services or policies/practices to address any risks or issues, as appropriate, which are identified from their complaints process.
4. Consumer Duty – Impacts to the AR regime proposals
As referenced above, Principals will need to ensure their ARs are meeting the outcomes of both the AR regime proposals and, the new rules proposed under the Consumer Duty. The Duty applies to products and services offered to retail clients and to firms that could have an impact on outcomes for retail clients, whether or not they have a direct relationship with the retail client. Firms with ARs will therefore need to consider how they can ensure their ARs are adopting the standards and requirements required at the Group level, alongside providing evidence to support this. The evidentiary burden of consumer duty implementation across the AR population being one of the biggest challenges we are currently seeing in the industry.
Our recent IMW sector survey aimed to better understand the impact that the FCA’s new Consumer Duty will bring to asset and wealth managers and capture the elements of the Duty propositions that may concern the firms the most. The survey explored which outcomes may present the biggest challenges for firms in the sector to achieve and implement. Firms participated in the survey provided a representation across various types of firms of the IMW sector such as asset managers, investment platforms and wealth managers covering various asset classes including alternatives.
One of the themes that emerged from our survey was concern regarding how firms can develop meaningful MI to monitor consumer outcomes. Under the Duty, one significant requirement under the customer understanding outcome is for firms to test and regularly monitor communications that are important to customers’ decision-making, with more detailed requirements on customer service. Firms will need develop and collate Key Risk Indicators (KRIs) to evidence compliance with of Consumer Duty outcomes and firms should ensure they are not underestimating the lead time required to ensure they map and capture appropriate MI in order to demonstrate they are achieving good customer outcomes. Firms should consider the prioritisation of any process design and implementation that will capture the necessary information required to evidence adherence to Consumer Duty requirements at both the Macro/Principal Level, which should work in parallel to meet the requirements under the CP21/34 to update the information Principals hold on their ARs.
Firms will also need to ensure they are conducting continuous monitoring of products and services to ensure they remain consistent with the target market needs, which will require development of relevant MI to monitor customer behaviour and product performance. Firms should be embedding the relevant MI appropriately into their governance processes and ensure that Boards are obtaining early sight of this information.
For more information on how the Duty will impact Wealth and Investment managers and how firms can best prepare, see our latest blog here.
The proposed changes to the AR regime will set a higher expectation for Firms to have more robust oversight and increased and more effective management information for those firms who have ARs or may have ARs in the future. Though the FCA are yet to release final rules, firms should be well advanced in their implementation programmes.
Alongside the requirements of the AR regime, the FCA have a simultaneous focus on evidencing good customer outcomes and firms need to consider synergies with the Consumer Duty requirements, particularly with regards to data availability and evidentiary burdens. This will require firms to think strategically about how they are going to undertake the required analysis and assessment of current state and future state to deliver the requirements under the AR regime proposals, simultaneously ensuring they are consistent with the focus of the FCA in driving the industry around its consumer duty priorities.
How we can help
We work with multitude of firms in the investment and wealth management space, with projects spanning multiple regulatory focusses and concerns, with a current focus on supporting firms with the AR regime proposals and Consumer Duty.
If you would like a conversation around any of the themes in this blog and our recent work in the industry with clients addressing the regulatory proposals and/or other support firms require, please reach out to David Clements, Paul Caccavale, Bobbi Hine, or Paul Fraser.