A guide to keeping track of FCA AR tracking expectations
There is still attention being paid to appointed representatives and their principals by the FCA. Regulators have already asked principal firms how they assess ARs and manage them in ICAAPs this year. As well as issuing alerts regarding the responsibilities of principal firms, the FCA also took enforcement action. The responsibility of supervising your appointed representatives falls on you as a principle firm. You can find more information at marshallsterling.co.uk.
A tied agent arrangement or an appointed representative arrangement allows firms to conduct regulated activities without undergoing the lengthy FCA authorisation process. The principal firms hold ARs accountable for violation of FCA rules when they act as agents of their principal firms under written agreements.
Various factors make AR arrangements attractive to companies. In this way, firms can build up their profile and test the market before applying for FCA approval, or offer services during the approval process. Additionally, fund sponsors can offload the burdensome obligations of AIFMD by combining these services with AIFM hosting services.
These arrangements can also be beneficial to companies willing to assume the risks associated with acting as principals. In most principal firms, ARs are charged fees to use their permissions and to be supervised.
Several FCA-regulated firms have an entirely principal-based business model. It is possible for these firms to oversee dozens of ARs, though this number can reach hundreds in the advisory sector.
It is expected that principal firms monitor their ARs effectively as long as they do so. It was reported in a 2016 thematic review that many insurance companies lacked oversight over ARs. As the FCA focuses on the wider financial services sector, it is now monitoring a number of appointed representative arrangements. There was recently a series of alerts issued by the regulator regarding principal firms’ responsibilities.
In the absence of oversight on the part of principal firms, their appointed representatives are subject to substantial compliance risks.
A principal firm’s ARs are subject to due diligence requirements, regular monitoring, written agreements, and regulatory capital requirements.
Applicants for AR positions should demonstrate that their principal firm has assessed their potential risks and can effectively supervise their activities before being appointed. It is also important to take into account AR’s solvency, fitness, and propriety, as well as the fitness and propriety of the senior managers.
Providing sufficient resources for implementing risk-based monitoring programs for each of their ARs is important for principal firms.
According to the FCA handbook, agreements between principals and ARs must be accompanied by prescriptive requirements. This includes exercising oversight of the AR’s activities, ensuring that the risks associated with those activities are mitigated, as well as taking other measures that will enable the AR to carry out the activities described in the article, among other things.
ICAAP considers AR risks as part of the internally assessed capital adequacy process by principal firms, and recommends that extra capital is held to cover AR risks.
FCA reviewed numerous insurance firms’ principals and their ARs and found that many of them did not meet FCA’s minimum expectations. In addition to these challenges, companies that provide AR services for investment products might also face sector-specific risks (e.g., exercising discretion on clients’ portfolios).