The FCA has warned firms to ensure that they comply with new rules that strengthen the responsibilities and expectations of principals in relation to their appointed representatives (ARs).

Failure to comply will risk regulatory action, the watchdog said.

The rules were introduced by the FCA in December 2022 and mean principals must provide the regulator with more information about their ARs.

Since it set up its new Appointed Representative department, FCA intervention has resulted in principals terminating their relationships with more than 1,300 ARs between 1 July 2022 and 31 August 2023.

In an update published on Friday ‘Improving the Appointed Representatives regime through greater use of data’, the FCA said there were currently around 2,900 principals with approximately 35,000 ARs reporting into them.

Around 14,000 ARs are Introducer ARs (IARs) who can only undertake limited activities (making introductions and distributing financial promotions) on behalf of the principal.

The FCA said IARs are lower risk, provided they are strictly limited to their scope. It said: “It is therefore critical that principal firms ensure their IARs are sticking to their limited activities and should consider what checks might be appropriate.”

It said if an IAR is engaging in activities beyond the terms of the scope of their appointment, they may be committing an offence. If so, they may need to be full ARs, which requires the principal firm to carry out the relevant appointment checks and oversee their activities differently.

The FCA set up a new AR department in 2022 to lead its cross-FCA strategy on ARs and high-risk casework. It said it has also supported the Treasury’s work to assess whether wider legislative changes are needed.

Meanwhile 12 firms have applied for the imposition of requirements (VREQs) to restrict how they carry out their business, and there have been many more informal interventions.

The FCA said: “While the AR regime has benefits, including encouraging effective competition and providing market access, there is evidence of harm, particularly because of poor principal oversight.”

It added: “Our analysis showed that principal firms saw a greater proportion of conduct issues for the revenue generated from regulated activities compared to other directly authorised firms.”

Financial services firms use the AR regime to distribute mortgages and investment products like ISAs or pensions. 

Consumer finance and consumer investments sectors are two of the three largest sectors by AR population, the FCA said. The sectors contain the mortgage brokers and advisers and intermediaries’ portfolios, where principals of many of the largest AR networks operate. 

The three largest sectors, consumer finance, general insurance and protection, and consumer investments, account for 92% of the current AR population.

Overview of the FCA’s new AR rules

• Enhanced oversight requirements: Apply enhanced oversight of ARs, including ensuring having adequate systems, controls, and resources.
• Annual self-assessment: Prepare a single document demonstrating compliance with obligations as a principal, identifying any risks and gaps. The firm’s governing body should review and sign off this document at least annually.
• Annual review of AR’s activities and business: Annually review information on the ARs’ activities and business, including the fitness and propriety of senior management, the ARs’ financial position and the adequacy of the principal’s controls and resources to effectively oversee the AR.
• Review oversight approach: Principals should review whether their oversight remains appropriate in certain situations, for example, the size or volume of the AR business involving regulated activity increases significantly in a short period of time.
• Notification of planned AR appointments: Notify us of an intended AR appointment 30 calendar days before it takes effect. Our new forms gather more detailed information.
• Annual reporting: Provide complaints and revenue information for each AR to the FCA on an annual basis and confirm AR details are correct as part of annual attestation.