5th January 2022
This article was first published in CIR Magazine.
Regulators have been far more open in recent months as to initiatives they have planned for the year ahead, and what they expect from the companies they regulate. In particular, 2022 will be a truly defining year in terms of the way in which the UK treats its regulation of appointed representatives (AR).
The UK is the only country in the world that operates under an appointed representative regime, and as such we have a system in which regulatory principal firms enable ARs to use their authorisation to operate. It is estimated that there are currently around 3,600 principal business’ which are providing regulatory authorisation to circa 40,000 ARs. The figures highlight the task that principal firms must ensure that the AR are using their regulatory permissions correctly.
It is an issue that has been recognised by the Financial Conduct Authority which has put in place a number of initiatives that will ensure greater focus on the actions of ARs.
While the regulators have been open as to the fact they are looking at the AR sector the timetable is a little more opaque. It is likely that most principal firms have been served with Section 165 notices. These consist of an extensive questionnaire which aims to understand the oversight and robust systems and controls principal firms have in place to ensure that have a full understanding of the actions and operations of the AR under their regulatory umbrellas.
The notices were required to be filed by year end and the data will be analysed before the FCA are more than likely to then conducts one to one discussion with firms to explore specific areas or concerns.
This supports the ongoing CP21/34 consultation into the improvement of the current AR regime. The aim is to understand how firms can best oversee their AR partners. At Davies we have a very robust approach to AR compliance, but it is fair to say that there are other principal firms which do not have the required level of oversight and it is certain they will be faced with some difficult discussions in the months to come.
The FCA has been open in terms of its focus for the year ahead. The consultation for the industry’s responses to the plans laid out in CP21/34 will last until 3rd March 2022 at which time the FCA will then consider the next steps. The timetables for the next steps have yet to be revealed. However, the FCA is likely to take the view that the market has been given ample advanced warning of the consultation, there will be little room for manoeuvre in terms of the timetable for implementation.
We are already increasing our resources both in terms of systems and staff but some of the smaller principal firms may find that the increased onus will impact the bottom line, as regulatory change often comes with a cost.
The market has to react to the FCA’s new requirements and do so in a way which makes it clear they have the systems in place to effectively manage their AR. A failure to do so runs the risk that the FCA may decide that the AR regime is not fit for purpose in the current regulatory form, and therefore make the decision that all those operating under the regime are then required to transition and or apply for direct FCA authorisation.
The result would be many of the 3,400 principles in the market are quite simply no longer required and therefore forced to cease business.
The market will face regulatory challenge in 2022 around AR oversight but the right response will benefit all, as stronger diligent oversight will enhance our ability to meet the needs of our clients and in turn will support the FCA and HM Treasury’s view on how valuable the AR regime is within the UK.
To continue the conversation, please contact Shyam Raikundalia, Compliance Director via Shyam.Raikundalia@davies-group.com
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