The window for submitting complaints and revenue data for appointed representatives (AR) is now open. From the 30th November, firms are expected to provide the FCA with this data on their first annual reporting date.
If you are a principal firm for an AR, it is important to understand your responsibilities and obligations to ensure that your ARs comply with regulations and operate under your supervision.
Once the FCA have received and reviewed the first round of data, it is inevitable that principal firms will come under increased scrutiny. There is also the potential for further reporting in future, but in the meantime let's look back at the key responsibilities for principal firms and take an in-depth look at the reporting requirements that principal firms are now subject to.
Key responsibilities of a principal firm
As a principal firm, you have several key responsibilities when it comes to your appointed representatives. These include:
- Having a written agreement with the AR, setting out what business they can do. This should clearly outline the scope of the AR's appointment, including the regulated activities they are authorised to carry out, any restrictions on their activities, and the terms and conditions of their appointment.
- Assessing an AR before appointing them to ensure they are fit and proper, financially stable, and suitable to carry out business for your firm. You must also ensure that the AR has appropriate systems and controls in place to comply with FCA regulations.
- Notifying the Financial Conduct Authority (FCA) when you appoint new ARs at least 30 days before the appointment takes effect. The notification should include details of the AR's appointment, including their name, address, and the regulated activities they will be carrying out.
- Reviewing information on ARs' activities, business, and senior management regularly to ensure they are complying with FCA regulations and operating within the scope of their appointment. Having a good working relationship with your ARs can make it easier to spot areas of concern.
- Ensuring data on ARs is up to date and notifying the FCA of any changes, including changes to the AR's business, senior management, or regulatory status. This includes notifying the FCA of any changes to the AR's appointment, such as changes to the regulated activities they are authorised to carry out.
- Taking reasonable steps to ensure that ARs act within the scope of their appointment and comply with FCA regulations. This includes providing guidance and training to ARs on their responsibilities and obligations, monitoring their activities, and conducting regular audits to identify any potential areas of non-compliance.
- Ensuring at all times that your firm has the skills and resources to oversee your AR, including if an AR's business changes or expands. This includes having appropriate systems and controls in place to monitor the AR's activities and ensure compliance with FCA regulations.
- Providing complaints data and revenue information for ARs on an annual basis. This includes reporting on the number and nature of complaints received by the AR, as well as the AR's revenue and profitability.
- Being clear on when and how to terminate an AR relationship. This includes having appropriate termination clauses in the written agreement and following the FCA's requirements for terminating an AR relationship.
- Ensuring an AR continues to meet the necessary standards (such as the Consumer Duty). This applies to the regulated activities carried on by the AR for which you have accepted responsibility. This includes monitoring the AR's compliance with FCA regulations and taking appropriate action if non-compliance is identified.
Reviewing information on ARs' activities and senior management
It is important for principal firms to review information on their ARs' activities and senior management regularly. The FCA expects principal firms to have a system in place to monitor their ARs' activities and to ensure they are complying with regulations. The frequency of these reviews will depend on the nature and complexity of the AR's business, but they should be conducted at least annually.
The review should include an assessment of the AR's business plan, financial statements, and compliance procedures. The principal firm should also assess the AR's senior management for fitness and propriety, which includes competence and capability. If the principal firm delegates functions or tasks to an AR, they should put safeguards in place, including identifying conflicts of interest and implementing enhanced monitoring.
Steps to ensure that ARs act within the scope of their agreement
As the above paragraph shows, it is no longer enough to rely on the Appointed Representative agreement to ensure that each party of the agreement is discharging their respective responsibilities. Principal firms are wholly responsible for the actions of their ARs and must be taking steps to ensure that they are not acting outside of the scope of their appointment.
Below are some practical steps that principal firms can take:
- Provide clear guidance and training to ARs on their responsibilities and obligations – including compliance with FCA regulations and reporting requirements.
- Monitor and conduct regular audits of ARs' activities to identify any areas of non-compliance – this includes reviewing the AR's compliance procedures, financial statements, and business plan, as well as conducting on-site visits to assess the AR's operations.
- Take appropriate action if an AR is found to be acting outside the scope of their appointment or issues pertaining to consumer harm are identified – you don't have to look far back through the FCA's enforcement action to see that identifying an issue and not doing something about it promptly is very much, and rightly, frowned upon. You may include providing additional training or guidance to the AR, implementing enhanced monitoring, or terminating the AR's appointment.
One of the easiest approaches you can take as a principal firm is to look at employees of the AR as if they are your own. What would and wouldn't you expect of your employees? What would and wouldn't your employees expect of you? These are questions you should be asking yourself when considering how best to have oversight of your ARs.
The principal firm's annual self-assessment should be a single document designed to identify risks and gaps in compliance, reviewed and signed off by the governing body at least every 12 months, kept for at least 6 years and must be made available to the FCA if requested. The self-assessment should not only identify any material deficiencies or concerns but also set out a plan to address them.
The self-assessment should cover the following areas of the principal firm's:
- governance structure, risk management framework, and arrangements for oversight of ARs;
- financial resources, capital adequacy, and liquidity;
- systems and controls for compliance with FCA regulations, including monitoring and reporting;
- controls around conduct of business, including treating customers fairly, complaints handling, and financial promotions;
- systems and controls for preventing financial crime, including anti-money laundering and counter-terrorist financing; and
- compliance with prudential requirements, including capital adequacy and liquidity.
Principal firms should ensure they have the necessary resources and expertise to prepare the self-assessment and address any material deficiencies or concerns identified. This may include hiring additional staff, seeking external support, or investing in new systems and controls.
The principal firm should also ensure that it has appropriate training and development programs in place to ensure that staff are equipped with the necessary skills and knowledge to comply with FCA regulations and carry out their roles effectively.
As the authorised firm, the principal firm is responsible for ensuring that its ARs comply with FCA regulations and reporting requirements. It must ensure that it has appropriate systems and controls in place to capture and report complaints and financial data accurately and in a timely manner.
As a principal firm, you need to ensure that your ARs are aware of their reporting obligations and have the necessary systems and controls in place to enable compliance with reporting requirements.
If an AR fails to comply with reporting requirements, the principal firm may be held responsible and may face regulatory action.
For many ARs this is the first time they may have been required to produce this data. For principals who have been recording this data centrally, it is a case of ensuring the quality of that data now it is subject to review by the FCA. In both scenarios, it may take time for new processes to embed and become business as usual. Principles must be cognisant of this and not expect their ARs to have data of sufficient quality at short notice.
For many, it’s a question of "do we have the right systems and controls in place?"
If your answer to that question isn't a resounding yes, then DWF can help. We can help you design, implement and embed the systems and controls to provide you with the level of oversight needed to properly meet your obligations. We can carry out data validation prior to the submission of complaints and financial data – being certain that what you are submitting is accurate, relevant and a true reflection of your ARs' business activities is crucial to avoid unnecessary scrutiny. We can also assist with your annual review process and documentation. Similarly, if you as a principal firm are subject to an Independent Review at the behest of the FCA, or even a Skilled Person's review, we can also assist. So, please don't hesitate – if you think you need our help, please get in touch.
Thanks to Andrew Jacobs, Luis Hernandez and Rachel Kpiki for their contributions.