FCA Expectations For AR Tracking – How to keep an Eye on Them

The FCA continues to pay attention to appointed representatives and their principals. Principal firms have already been asked by the regulator how they assess and manage ARs and how they capture those risks in ICAAPs this year. Also, the FCA issued alerts regarding the responsibilities of principal firms and enforcement actions related to those responsibilities. It is your responsibility as a principle firm to ensure that your appointed representatives are properly supervised. For more information, visit marshallsterling.co.uk.

Who Are Appointed Representatives?

Firms can carry out regulated activities through appointed representative and tied agent arrangements without having to undergo the extensive and time consuming FCA authorisation process. ARs act as agents of their principal firms under written agreements, wherein the principal firm takes full responsibility for ensuring they comply with FCA rules and holds them accountable if they violate them.

Companies are attracted to AR arrangements for a variety of reasons. By using them, firms can test the market and build up their profile before applying for FCA authorisation, or offer their services while the application is being processed. By combining these services with AIFM hosting services, fund sponsors can also offload the burdensome obligations of AIFMD to the AIFM provider.

What Is The Relationship Between Appointed Representatives And Principal Firms?

In the same way, companies willing to take on the risks of acting as principals can benefit from these arrangements. Most principal firms charge their ARs a fee to use their permissions and to supervise them on an ongoing basis.
The business model of some FCA regulated firms is entirely based on acting as principal to firms seeking appointed representation. As many as dozens of ARs can be overseen by such firms, though in the advisory sector this can reach hundreds.

As long as principal firms supervise their ARs effectively, the FCA expects that they do so. Many insurance companies lack oversight over ARs, according to a 2016 thematic review. A number of appointed representative arrangements in the wider financial services sector are now the focus of the FCA. The regulator recently issued a series of alerts on the responsibilities of principal firms.

How Can Principle Firms Ensure That Ars Are Adequately Overseen?

A lack of oversight on the part of principal firms imposes a substantial compliance risk, as they are fully responsible for the conduct of their appointed representatives.

In relation to their ARs, the FCA expects principal firms to perform due diligence, monitor their accounts on a regular basis, prepare written agreements, and provide regulatory capital.

Due Diligence

A principal firm should show that it has assessed the risks associated with prospective ARs’ activities and that it has the resources and expertise to oversee them effectively before appointing an AR. AR’s solvency, fitness, and propriety, as well as the senior managers’ fitness and propriety, must also be taken into consideration.

Ongoing Monitoring

For each of their ARs, principal firms should implement a tailored risk-based monitoring program, ensuring that they have sufficient resources to implement these programs.

Written Agreements

The FCA handbook prescribes prescriptive requirements for written agreements between principals and ARs. As part of these, the principal should be able to exercise oversight and mitigate the risks associated with the AR’s activities, as well as other measures that will enable the AR to carry out the activities described.

Regulatory Capital

As part of FCA’s recent questionnaire sent to principal firms, FCA recommends that principal firms should take AR risks into account as part of their Internal Capital Adequacy Assessment Process (ICAAP) and hold extra capital to cover them.

A large number of firms did not meet the FCA’s minimum expectations in many of the areas where the FCA reviewed principals and their ARs in the insurance sector. A firm that provides AR services for investment products will also face the same challenges, but may also face sector-specific risks (such as a firm exercising discretion over client portfolios).