The Financial Conduct Authority (“FCA”) has published a review of its findings into how effectively principal firms are overseeing their appointed representatives, alongside examples of good practice and areas for improvement.

In 2022, the FCA set out new rules and expectations for principal firms in relation to how they managed their authorised representatives (“ARs”). The new rules were a response to concerns that principals were engaging in inadequate due diligence when appointing ARs, and then subjecting them to little oversight once appointed. The new rules mean that principals are responsible for making sure that ARs comply with the FCA’s rules as regards their activities as ARs, and that principals have greater obligations to oversee their ARs.

As part of these new rules, principals are required to – among other things – carry out appropriate checks before appointing ARs and to have adequate systems and controls in place to monitor ARs. In addition, principals are required to conduct both annual reviews of each AR they appoint and also annual self-assessments of their own ability to oversee their ARs.

The review considered how well principals were ‘embedding’ the FCA’s new rules, concluding that the oversight of ARs was “improving” but that there was “more to do”. For example, the review found that: 1 in 5 principals had failed to carry out a self-assessment or annual review of their ARs; nearly half were not regularly reviewing their AR agreements; a third of principals were not using data management information to monitor whether ARs were acting within the scope of their agreements; and most firms had not changed their AR onboarding or termination procedures.

In addition to these headline findings, the review contains detailed examples of good practice and areas for improvement which make for valuable reading for principal firms. For example, it points to the need to avoid a ‘tick-box’ approach to self-assessments and annual reviews and instead to produce “a written record capable of being reviewed and approved by the principal’s governing body”. Similarly, principals should ensure that there is sufficient record-keeping and an audit trail so that annual reviews contain an appropriate level of detail, rather than relying, for example, on “an email exchange and self-declaration from the AR in answer to the principal’s questions”.

More generally, the review also recommends that principals take a more proactive role in onboarding and then monitoring the AR’s activities (including potentially unregulated activities), not only by scrutinising publicly available information, but also performing quarterly and ad hoc checks, including in-person visits to ARs. It is also important that governing bodies and boards pay due attention to the need to oversee ARs and have sufficient resources to manage AR-related risks.

Commenting on the publication of the review, Jane Savidge, Interim Head of Department for Appointed Representatives at the FCA, said: “Some firms have been embedding our rules well, but some aren’t getting the basics right and are taking a ‘bare minimum’ approach. Principals must have clear, written AR agreements from the outset and effectively monitor their ARs to make sure they act within scope. The FCA has followed up directly with firms in the review and will take swift action where it sees principals not meeting its standards in the future.”

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