James Alleyne, legal counsel with London-based law firm Kingsley Napley LLP, considers a recent decision by the financial services regulator and its wider context that go to the heart of the FCA’s long-standing concerns about the rules governing persons who carry out regulated activities on behalf of FCA-authorised companies. A recently concluded consultation is expected to result in regulatory changes to the ‘AR regime’ with sector-wide implications.
On 13 May 2022, the Financial Conduct Authority (FCA) published a final refusing Alexander Jon Compliance Consulting Ltd.’s (“AJCC”) application for authorisation to provide regulatory hosting services.
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There is no specific definition of what a regulatory host is, but the FCA generally regards it as a commercial arrangement whereby an authorised Principal firm appoints and oversees a number of unconnected Appointed Representatives (“ARs”) which operate across a range of markets.
AJCC had applied for various regulatory permissions in October 2020, including arranging deals in investments and advising on investments. Its proposed business model was to operate as a regulatory host, whereby it would carry on regulated activities through a number ARs, who would deal directly with retail consumers, and for whom it would be ultimately responsible.
In scrutinising AJCC’s application, the FCA was not satisfied that it would be able to satisfy the minimum requirements for authorised firms (its Threshold Conditions). In particular, the FCA found that the applicant failed to show the necessary non-financial resources to be able to oversee its ARs effectively, including lacking staff with sufficient skill, experience and understanding of the business, and could not demonstrate how its ARs would ensure that products being offered to retail consumers were appropriate for them. The FCA also found that the firm’s proposed business model was not suitable or viable in the long term.
The real significance of this case, however, lies in its wider context. The FCA has long-standing concerns about the AR model, and considers regulatory hosting to be of particularly high risk, with Principal host firms frequently lacking the resources and expertise to oversee their ARs effectively. This is reflected in both the FCA and Financial Ombudsman Service (“FOS”) seeing a higher number of complaints from this type of arrangement than in other AR business models.
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By GlobalDataMoreover, in its 2022-2023 business plan the FCA confirmed that increasing scrutiny at the gateway and mitigating the potential harm caused by the AR regime were key organisational priorities, and this decision certainly reflects an increasingly bullish approach by the regulator towards the protection of consumers.
Indeed, there can be little doubt that the FCA will continue to mitigate harm assertively in this area. In February 2021 it took intervention action against Marshall Sterling Investment Management Ltd, requiring it to terminate its AR relationships due to poor oversight, and has recently launched a dedicated new AR supervision department to proactively identify harm, improve standards across the sector and to take supervisory action against non-compliant firms.
AR regime consultation
It has also recently consulted on regulatory changes to the AR regime – including increasing the notification requirements for Principal firms and clarifying the expectations of Principals – ahead of a policy statement anticipated imminently.
Similarly, in September 2021, HM Treasury launched a call for evidence to better understand how and where legislative change may be required to improve the AR regime generally. This may include extending the FCA’s supervisory and enforcement remit to ARs directly, rather than against just the Principals, extending the remit of the FOS to investigate complaints against ARs, and placing more obligations on ARs which may potentially include extending the Senior Managers and Certification Regime to them. All of these initiatives reflect an aggressive approach to the regulation and supervision of Principles and ARs by the FCA.
In our experience, we are increasingly seeing firms wishing to enter the perimeter as Principals being subject to high levels of scrutiny, whilst the FCA’s supervision of those already operating in this sector is becoming more intrusive and interventionist than ever before.
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