Author: AxiomHQ – axiomhq.com 

In December 2021, the FCA published its proposals for improving the oversight of appointed representatives.

What do the regulators want?

The FCA is looking to reduce harm to consumers by strengthening the appointed representatives regime.  From its thematic reviews of various sectors, the regulators cite the following areas of concern:

• Provision of misleading information provided to consumers. This prevents consumers from making an informed decision as they are unable to assess the products being sold or to understand potential risks posed by such products
• Provision of products and services which are not appropriate for the target audience
• Inability to identify harm and take remedial action
• Operating outside the boundaries of permitted activities

Principal firms should review their oversight arrangements and maintain an audit trail to demonstrate compliance.

The regulators want to see firms focus attention on the following areas:

• Improved monitoring, oversight and management of appointed representatives
• Principals must understand their responsibilities to the regulator
• Principals must identify issues and take corrective action to prevent harm
• Ensuring the products and services are provided to right target audience

Firms need to consider the following:

• Initial due diligence
• Ongoing monitoring
• Evidence to confirm due diligence has been completed
• Review and analysis of the data received

Key factors for consideration:

Firms need to understand who they are doing business with.  This means that firms need to complete due diligence to have a complete picture of the risks posed to the Principal firm prior to business commencing.  It also means that the Principal should ensure that they keep an eye open for any adverse media or indication of risks developing.

On a continuing basis, the Principal must monitor the activities of its appointed representatives.  This means ensuring that its own controls and resources are adequate to facilitate a regular review, at least annually.  Where the controls implemented by an appointed representative prove to be lacking, the Principal needs to consider whether it should trigger a notification to the FCA.  In some cases, an issue could trigger a termination clause in the business contract.  If so, how can the firm ensure an orderly exit from the business arrangement?

Financial assessment:

Before entering into any business arrangements, the Principal should assess the appointed representative’s viability and complete a risk assessment.  When reviewing the appointed representative’s business plan, the Principal should assess the financial projections, marketing plans and business model.  Supporting evidence could also include a copy of the appointed representative’s bank statement.  Once a business arrangement is in place, the Principal should monitor activities and revenues to confirm the arrangement is working as planned.

Competence assessment:

The Principal is responsible for the appointed representative’s regulated activities.  It is the Principal’s responsibility to assess that the appointed representative is competent to provide those regulated activities to the clients.  The Principal should ensure that the appointed representative is working to the same standards as the Principal.  The Principal may review any policies and procedures prior to engagement.  If those documents do not meet the Principal’s own standards, they should request that their own standards be adopted.

How would you assess competence?

It’s good practice to treat the senior manager in the same way as your employed senior managers.  For example, firms could request:

• copies of CVs and certificates to evidence qualifications
• details of CPD and any training completed (particularly relating to regulation)
• CRB checks
• Employment references

Approved persons:

All appointed representatives should have at least one senior manager responsible for directing the firm’s affairs.  This individual would be approved by the FCA as a governing function and the Principal firm is responsible for making this notification to the FCA.  In a similar vein, the Principal should assess competence regularly, not as a one-off exercise.

Use of checklists:

Where firms use checklists to confirm tasks have been completed, these should be qualitative checks.  This should not be a box-ticking exercise, but an opportunity to identify and mitigate potential risks as well as the assurance of an audit trail.

Firms should ensure that there is:

• Evidence to confirm how a task was completed
• Any data collated is reviewed by a competent individual who scrutinises the details
• Any adverse data is investigated further and notes kept of any decisions

Firms should review the appointed representative’s business plan.  This helps the Principal firm to understand what business activities will be completed and allows the Principal to confirm the planned regulated activities fall within its own scope of permissions.

Next steps:

The consultation closes in March 2022.  Whatever your view, as a Principal, you must take stock of your appointed representative arrangements.  Are your processes robust enough to ensure compliance?  How can you improve your oversight? How quickly are issues escalated and managed issues?

How Axiom HQ can help you:

Axiom for Third Party Oversight takes the core benefit of the Axiom platform – powerful rules-mapping and evidencing – and uses it to bridge the gap between a firm and its third parties.  A seamless control environment between you and your third parties for genuine oversight.

https://www.axiomhq.com/third-party-oversight

Contact the Axiom HQ team to learn more call 020 3965 2166 or email [email protected]