To AR or not to AR? That is the question...

Posted on: 11 October 2022

Written by: Ben Antcliffe

Following the announcement of the enhancements being made to the Appointed Representative (AR) Regime, which are due to come into force in December this year, both Principals and ARs may currently be reconsidering their regulatory position.

With principals now being expected to raise the bar on their oversight and information requirements of ARs, this is likely to lead to increasing the costs of being an AR. As such, the age-old question resurfaces – "Is now the right time to become directly authorised?" If you currently find yourself in this position, this article sets out some considerations which should help steer firms to a better-informed decision in answer to the very question.

Key Considerations

  • Ability to meet threshold conditions – Whilst, in theory, any AR should already stand a good chance of meeting their threshold conditions given that they have been approved by their Principal firm; in reality though this might not be the case. For example, the simplest of issues such as whether the firm is a UK registered entity or whether they have the ability to meet FCA mind and management requirements. There are however other less publicised considerations regarding the skills, knowledge, and experience of those conducting the activity in assessing adequate resources. Indeed in recent months, the FCA has openly directed applicant firms to consider withdrawing their application and become an AR to gain relevant experience before they will be considered for approval. This is being seen in the Insurance sector where we are seeing the development of an unwritten rule adopted by case officers that applicants must have a minimum of two years’ experience and this experience must be current or in part within the last 12 months.   

  • Ability to manage your own compliance – A major benefit of being an AR is that the Principal firm will usually furnish you with policies & processes, take care of assurance activity, manage complaints, and complete any FCA notifications. There are a number of ARs, especially in the mortgage world, who see this as a benefit and a comfort blanket in allowing them to get on with servicing their clients. Firms should not underestimate the skill and resource requirements of being capable to manage this on their own or with the support of a consultancy.

  • Commercial Sense – With the likely increase in costs of being hosted by a principal firm, firms might want to compare their onboarding and ongoing AR costs against the costs involved with direct authorisation and ongoing fees, especially where regulation is a cost as opposed to a revenue generator in its own right.

  • Ability to increase product offering – When appointed as an AR, you will inevitably be limited in your product options, which is why finding the right Principal for your activity is really important. As an example, if the average loan size of a motor dealer changes in line with offering higher value vehicles, the motor dealer should ensure their principal firm provides access to competitive finance products within their price point. If they do not, then they could lose the competitive advantage they had set out to achieve by offering finance in the first place.

Changes to Principal Firms

ARs and Prospective ARs should also have a reasonable understanding of what is changing in the rules which apply to Principal firms, to understand the value proposition of a Principal firm agreement. Especially considering that the cost of the arrangement will inevitably increase as new requirements are imposed.

In summary (but not an exhaustive list) the new rules introduce for Principal firms:

  • Annual firm attestations for each AR to confirm the FCA register entry remains correct

  • Enhanced Regulatory reporting including:

    • Complaints Data at AR level - Currently these are held at Principal level and by providing more details on complaints the FCA feel they will have more visibility.

    • AR regulated income and banding of non-regulated income streams - This should not increase the total income declared pre-rule change, but it will now be more transparent as to where the income is attributed to and the FCA will be provided with more quantitative insight.

    • Non-financial non-regulated income for each AR - This must be reported to the FCA on an ongoing basis with income bandings as opposed to exact figures.

  • Minimum annual checks of AR solvency and Fitness & Propriety of AR Controllers & Approved Persons. These checks should also be completed more regularly if triggered by an event such as a change in an approved person, business model, complaint concerns, etc. Records of these checks should be retained for 6 years.

  • In general terms, there will be an increased level of oversight of the regulated activity including the gathering of MI to be assured that the AR is acting in line with Principal level policies and expectations.

  • Additional terms are to be added to AR agreements requiring ARs to provide information to the Principal in order to meet the FCA requirements and Principal rights of termination where the AR is not able to meet the requirements set.

In summary, the AR regime does not work for all firms nor does the direct authorisation route; however in making this decision firms should seek out information and advice in weighing up the pros and cons.”

Ben A v2

Ben Antcliffe

Ben is the Associate Director leading the Consumer Credit & Insurance team He specialises in the Consumer Credit, Mortgages and General Insurance sectors, providing daily compliance services and support to a wide range of clients.

Contact Ben

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