February 2, 2024


by: kiran

Helping principal firms be AR ready

The FCA’s new rules to make authorised firms more responsible for their ARs came into force on 8 December 2022. These clarified and strengthened the responsibilities and expectations of Principals.

Why were they needed? Due to the FCA’s concerns that Principal Firms oversight, control, and supervision of ARs is not up to scratch and that some firms have been using the regime to evade scrutiny leading to consumer detriment. The FCA found that Principal Firms and their ARs generated up to 400% more supervisory cases and complaints than other directly authorised firms.

In summary, the rules require Principals to provide more information on ARs (including Introducer Appointed Representatives (IARs)) and to be able to evidence that ARs experience the same level of oversight and supervision as if they were part of the Principal Firm itself. The changes made go together with the Consumer Duty. If you are a Principal Firm, you should ensure that you have appropriate controls in place to effectively oversee your ARs’ activities and ensure that your ARs comply with the Duty. The FCA has confirmed that when they assess whether a Principal Firm has complied with the Consumer Duty, they would also consider the actions of its ARs. Where an AR is acting under the authority of its principal and within scope of the AR agreement, the FCA would treat failure to comply with the Duty as a breach of the Duty by the Principal.

As it has now been over a year since the rules were implemented, there has been plenty of time for Firms to have embedded the new requirements and to show how they have enhanced their frameworks (both in respect of the new AR requirements and the Consumer Duty). We can expect much more engagement from the FCA in this area especially as they will have received their first set of new data from many regulated firms during 2023.

What Firms need to consider:

Principals should have taken the necessary steps to comply with the changes by now and to fully understand what the FCA’s concerns have been in this area. Such consideration includes:

  • Onboarding: That you have reviewed, assessed, and made any changes as necessary in the way you recruit and onboard ARs – including that sufficient due diligence is undertaken prior to engagement;
  • Monitoring & Oversight: That you have reviewed, assessed, and made any changes as necessary in the way you oversee, monitor, and enforce ARs compliance with the relevant requirements. This includes having structured plans in place and being able to evidence that monitoring is carried out in sufficient depth to identify any weaknesses;
  • Regulated Activities: That appropriate mechanisms are in place to ensure that ARs and IARs are sticking to the activities for which you have given them permission to undertake;
  • Resources: That you have relevant resources in place to effectively oversee monitor your AR population (including when ARs may experience significant growth);
  • Overseas ARs: Where you have Overseas ARs, specific risks in relation to these (such as jurisdiction risks, language barriers) have been identified and appropriately addressed;
  • PII: That you hold appropriate Professional Indemnity Insurance (PII) which covers the activities of current and former ARs;
  • Annual Self-Assessment: That you have put the controls in place to enable you to carry out the annual self-assessment (the single document demonstrating compliance with your obligations as Principal which much be signed off by your governing body at least annually);
  • Annual Review: That you carry out an annual review of ARs activities and business (including fitness and propriety of senior management, the ARs financial position and the adequacy of your controls and resources to oversee the AR)
  • Notifications & Reporting: That you have updated your Policies and Procedures to enable you to meet the FCA notification requirements on new appointments and have implemented a framework that allows you to report to the FCA on complaints and revenue information for each AR on an annual basis.

As well as continuing their data-led and assertive supervision of Principal Firms, the FCA has confirmed that in 2024, they will be testing whether firms are properly embedding the new rules across the AR regime; and increasing and improving their engagement with firms and other stakeholders. It is therefore extremely important that you have addressed all the above areas and any other specific risks that your business model may expose you to.

Should you require support in keeping your compliance or any other regulatory matter in good health, please do not hesitate to contact Padda Consulting.