Compliance
UK Regulator Turns Up Heat On Appointed Representatives System

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The UK regulator, the Financial
Conduct Authority, is consulting the financial services
industry over tightening oversight on appointed representatives
following “a wide range of harm” in the AR space, it said in a
statement last Friday.
ARs carry out regulated activity on behalf of FCA-authorised
firms.
In 2019 the FCA conducted a multi-firm review into how principal
firms in the investment management sector oversee their appointed
representatives. The regulator found that most principal firms
had weak governance and risk management frameworks in place
(source: Bovill, 16 June).
Problems often occur because principals don’t carry out enough
due diligence before they appoint an AR, or fail to oversee and
control them adequately, the FCA said.
“The FCA’s proposed changes to the regime aim to address the harm
arising in this market while retaining the cost, competition and
innovation benefits the AR model can provide. The proposals would
improve principals’ oversight of ARs and require principals to
provide the FCA with more information on their ARs, allowing the
FCA to spot risks more quickly,” the regulator said.
“The appointed representative model helps bring choices to
consumers, but the level of harm we are currently seeing is too
high. There are real risks of consumers being misled and mis-sold
with little scope for recourse,” Sheldon Mills, executive
director for consumers and competition at the FCA, said.
PIMFA, the wealth management industry group, wants the FCA to
make better use of the data it collects when supervising ARs.
“The FCA has clearly identified issues within the AR model which
are not working well for consumers. Given the relative size of
the AR Universe, we believe that a data-led approach is the right
one provided that it is proportionate,” Simon Harrington, senior
policy advisor at PIMFA, said. “As we have set out previously to
the FCA, larger principals, which are directly authorised already
have developed oversight models of their ARs and we hope that
while these proposed changes may lead to some tweaks to their
model, it will not represent a huge overhaul.”
“The challenge for the regulator is how it uses any additional
data collected in its supervision and enforcement activities. It
is clear from the data provided that significant harm does enter
the market through elements of the AR regime,” he
continued. "The regulator already collects a substantial
amount of data at great financial and resource cost to the
industry and we have little evidence of what it does with it.
These additional requirements placed on firms who are already
more than fulfilling their obligations with regards to being
principals will only be worthwhile if the bad actors in the
market either reform or leave,” Harrington added.