Checklist: Pre-appointment checks to consider when selecting an appointed representative (UK)

Introduction

This checklist will assist in-house counsel and private practice lawyers with respect to what authorised firms need to consider including the conditions that must be satisfied before appointing an appointed representative and the ongoing compliance obligations as provided for in chapter 12.4.2R of the Financial Conduct Authority (FCA) Handbook’s Supervision manual (SUP).

This checklist addresses the following steps:

1. Consider compliance with regulatory requirements
2. Review resources and suitability of the appointed representative
3. Managing, monitoring and oversight
4. Ensure a written agreement is in place
5. Notification and ongoing compliance requirements

The checklist is presented as a list of requirements that can be checked off as they are addressed. At the end of each step, there are explanatory notes corresponding with each requirement in the checklist.

This guide can be used in conjunction with the following How-to guides: The appointed representatives regime explained – what it means in practice, The general prohibition – beware the consequences of breach, Introduction to the UK financial services regulators and Checklists: Preparing an application to the FCA or the PRA for a Part 4A permission, Preparing an application to vary a Part 4A permission at the request of a firm.

Step 1 – Consider compliance with regulatory requirements

Step 2 – Review resources and assess suitability of the appointed representative

Step 3 – Managing, monitoring and oversight

Step 4 – Ensure a written agreement is in place

Step 5 – Notification and ongoing compliance requirements

Explanatory notes

Overview

An appointed representative (AR) is a person or firm who carries on a regulated activity on behalf of, and under the umbrella of, an authorised firm (the principal) (section 39 Financial Services and Markets Act 2000 (as amended)(FSMA)) without themselves needing to obtain a full authorisation from the Financial Conduct Authority (FCA). Any person, other than a person authorised directly by the FCA, may become an AR, including a body corporate, a partnership or an individual in business on his own account.

Under section 39(1) FSMA, an AR is exempt from the general prohibition (on performing regulated activities without being authorised) if a contractual agreement is in place under which the principal accepts responsibility for the AR in writing. The contract can only permit the AR to carry on business of a prescribed description in line with the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001 (AR Regulations), which specify the regulated activities an AR can carry on. A principal can only permit its AR to carry on regulated activities for which the principal itself has obtained a permission from the FCA, as provided for under Part 4A FSMA.

The principal needs to ensure that the AR understands the rules to which it is subject and needs to monitor and supervise the AR fully to meet all regulatory requirements and minimise its own regulatory risk.

Rules relating to ARs are set out in Chapter 12 of the Supervision manual (SUP 12) of the FCA Handbook. Firms considering appointing an AR need to be aware of their compliance obligations. This checklist considers the factors to be assessed against SUP 12.4.2.R prior to appointment. It does not cover specific requirements, for example, in relation to introducer-appointed representatives (IARs). IARs are ARs who can only undertake limited activities (eg, effecting introductions and distributing financial promotions) on behalf of the principal. This checklist also does not cover requirements applicable to specific industry sectors (eg, insurance distribution activity).

Legal framework 

This checklist covers the requirements under:

• the Supervision manual in the FCA handbook (SUP);
• Senior Management Arrangements, Systems and Controls sourcebook (SYSC);
• threshold conditions in the FCA handbook (COND);
• Fit and Proper test for Employees (FIT);
• Training and Competence sourcebook (TC);
• section 39 FSMA;
• Principle 6,7 and 12 of the FCA principles for business (PRIN);
• the Consumer Duty; and
• the AR Regulations.

The FCA introduced changes to the AR regime in PS22/11: Improving the Appointed Representatives regime requiring principals to provide detailed information, monitoring and oversight of their AR arrangements. It is the responsibility of the principal to ensure that its ARs are fit and proper to deal with clients in its name, and to assess and monitor the risk that their ARs pose to consumers and markets and provide the same level of protection as they do for their own business. The FCA have stated that a principal’s oversight of its ARs’ activities should be of a ‘comparable standard as if they were an individual directly employed by the principal.’ It is therefore essential to consider whether you have the appropriate frameworks in place prior to appointment of the AR, and whether you need to arrange suitable training for your ARs and the senior management of the firm. The responsibility for the control and monitoring of the AR activities rests with the senior management of the principal. The amendments were set out by the FCA in a policy statement published in August 2022. The FCA will monitor whether firms have effectively embedded the new rules (eg, through site visits) and have added oversight of appointed representatives as a key priority of their 2024/5 Business Plan. The FCA recently published a review of how principal firms are complying with these enhanced oversight rules.  Whilst some principals had made some effort to comply with the new rules, the FCA noted that the quality and completion of self-assessments and annual reviews requires improvements.  Where principals have not changed onboarding or termination procedures (considering their existing processes sufficient) they should be able to evidence why.  Firms should consider these findings and identified areas of good practice when considering compliance and sufficiently document any revisions. The FCA are continuing to review the need for further policy review and alongside HM Treasury are considering potential legislative changes in this space.

Step 1 – Consider compliance with regulatory requirements

1.1 Do you have the appropriate permission for the business which the appointed representative is going to carry out?

ARs do not have carte blanche to carry on any type of regulated activity. The contract between the principal and the AR sets out the regulated activities the AR is permitted to carry on and for which the principal assumes regulatory responsibility. The terms of the contract can only permit the AR to carry on prescribed business in line with the AR Regulations, which specifies the regulated activities an AR can carry on.

The AR Regulations permit a principal to appoint an AR to carry on any business comprising the regulated activity of arranging deals in certain investments, as specified by article 25 Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended) (RAO); arranging for the safeguarding and administration of assets, as specified by article 40 RAO; or advising on investments, as specified in article 53 RAO. This represents a broad range of regulated financial services activities (see also SUP 12.2.7G for more detail). Some activities, for example, the regulated activity of accepting deposits, are deemed too risky to be carried on by ARs and must be carried on by directly authorised firms only. Principal firms must hold compliant Professional Indemnity Insurance to cover the activities of current and former ARs where required to do so.

The regulated activities to be performed by the AR under the terms of its appointment must be amongst those the principal itself is authorised to perform or that are excluded from being regulated activities when performed by the principal, for example, because:

• they fall within article 28, RAO (arranging transactions to which the arranger is a party); or
• they constitute consumer buy-to-let (CBTL) business and the principal is a CBTL firm.

1.2 Have you considered the impact of the appointment on your ability to meet and continue to meet the threshold conditions?

Before appointing an AR, it is necessary to assess the impact of the appointment on your ability to meet and continue to meet the threshold conditions as laid out by the FCA. These are the conditions that are set out in schedule 6 FSMA and represent the minimum conditions for which the FCA is responsible, which the principal is required to adhere to upon authorisation and on an ongoing basis. It is the principal’s responsibility to ensure that the AR meets and continues to meet these FCA requirements. The FCA will expect all aspects of this to be thought through pre-appointment and to be considered on an ongoing basis post-appointment. This will need to form part of a firm’s monitoring procedures.

1.3 Have you conducted a risk assessment of the appointment (eg, considering risk of harm to consumers or to market integrity)?

Anything that an AR has done or has omitted to do, in respect of the business for which the principal has accepted responsibility, will be treated as having been done or omitted to be done by the principal itself.

There is, however, a risk that an AR engages in activity which is not permitted by the terms of its agreement, and whether the AR goes ‘rogue’ intentionally or unintentionally, there is a material risk that this is not detected until detriment is caused to the consumer.

It is therefore essential that prior to the appointment of the AR, firms adequately assess and monitor the risks that the activities of their ARs pose to clients. These include consideration of the following:

• the nature of the risks associated with the AR’s appointment and activities having regard to the business model, and senior management and governance arrangements (as applicable). If you reqularly delegate tasks or functions to an AR put safeguards in place eg, identify conflicts of interest or enhanced monitoring. ARs should be monitored to the same standard as employees; and
• the likely impact of certain scenarios arising in terms of the risk-profile of clients, number of clients and continuity of service provision (among others).

See SUP 12.4.4.C. This risk-based approach prior to appointment will assist you in establishing an appropriate level of monitoring in relation to the AR.

The FCA continues to monitor and assess risks in this area, including through visits to relevant firms.

1.4 Have you ensured that the appointed representative is ready and organised to comply with all requirements in the FCA Handbook?

Principals have responsibility for ensuring that their ARs comply with other relevant parts of the FCA Handbook (in addition to SUP) such as conduct of business rules (COBS) and Client Assets Sourcebook (CASS) (ie, regarding how client monies are held).

1.5 Have you ensured alignment of approach with the Consumer Duty

The Consumer Duty applies to all directly authorised firms and sets higher standards of consumer protection across the financial services sector than that provided under the ‘TCF’ (treating customers fairly) rules, which it builds upon. Under a new consumer principle 12, firms are required to put their customers’ needs first, embed higher standards of care across the customer journey and assess and evidence the extent to which and how they are acting to deliver good outcomes for them.

Overarching cross-cutting rules set the standards the FCA expects from firms, namely: to act in good faith, avoid causing foreseeable harm to customers, and to enable and support retail customers to pursue their financial objectives.

A further set of rules and guidance is detailed in the four outcomes which set the expectations for in-scope firms in the firm-customer relationship focusing on: products and services, price and value, consumer understanding and consumer support. The Consumer Duty came into force on 31 July 2023. The FCA publishes updated information for firms on their website which is regularly updated.

Changes to the AR regime and the Consumer Duty focus on the reduction of consumer harm and enhancing good consumer outcomes. Principals should align rather than duplicate their approach when considering their systems and processes for monitoring, oversight and recordkeeping eg, identify sources of data required for monitoring key outcomes for consumers and ensure that all underlying MI and data in existing practices can evidence that a firm is consistently providing good outcomes for consumers.  Consider what the AR's unregulated activities will be (if any) and whether there is a risk of consumer harm. 

Step 2 – Review resources and assess suitability of the appointed representative

2.1 Is the appointed representative financially solvent?

Prior to appointment and when onboarding, the firm must establish on reasonable grounds that the AR is financially solvent, and closely monitor the financial status of the AR on a continual basis to ensure it remains so. The firm should carry out annual checks on the financial position of the AR (and more frequently as deemed necessary), and review the information obtained very carefully when making business decisions.

Using a specialist adviser is recommended – for example, an accountant with sufficient expertise to consider and critically review the financial accounts. A specialist adviser can also ensure that the correct checks are undertaken (eg, where an AR is a partnership, it is important to consider the individual financial position of each of the partners as well as the individual partnership). Credit checks and checks with government bodies (eg, HMRC to check all taxes are up to date or reviewing linked individuals on Companies House) are also recommended.

A key question is whether the AR is likely to be adversely influenced by its financial position in its conduct of business for which the principal is responsible. 

This might arise, for example, if the AR has cashflow problems and is not able to service its debts. An insolvent firm is unlikely to be able to pay its staff and these are the same staff who are responsible for ensuring the protection of consumers who may be adversely affected by dealings with it. The AR’s insolvency may also adversely impact the solvency of the principal itself.

A firm should investigate any concerns that may arise about an AR’s financial standing and address these concerns appropriately including, for example, increased monitoring or, if considered necessary, suspension or termination of the appointment.

Guidance for firms on assessing the financial position of an AR is set out in SUP 12 Annex 1.

2.2 Have you considered the suitability of the appointed representative and conducted appropriate checks?

Adequacy of resources is not just about financial resources but also whether the AR has adequate human resources, in terms of the quantity (based on the size of the firm) and the quality (eg, fitness and propriety of management and staff who have the appropriate training, skills, knowledge and experience specific to the relevant activities, the appropriate general, commercial and professional knowledge and competence and the necessary time to perform the tasks for which they are responsible). It is not enough to rely on confirmation from a previous employer without doing your own assessment. The firm will need to have robust procedures, systems and controls to ensure they conduct  appropriate due diligence checks (both on an initial and ongoing basis) to assess whether the key individuals (including its directors, partners and managers) at the AR:

• are suitably qualified;
• have undergone, or are undergoing, training in relation to the  regulated activities and business carried out, or to be carried out, the financial products they sell on behalf of the principal.  Training should be provided on an initial and ongoing basis;
• possess a level of competence; and
• have the personal characteristics as required under the general rules of the FCA (eg, competence, integrity and good character). See SUP 12.4.4G.

In considering the competence and capabilities of relevant individuals, firms should note that other provisions, including SYSC 3.1 (systems and controls) and SYSC 5.1 (skills, knowledge and expertise), the requirements of the Training and Competence sourcebook (TC) and guidance in the Fit and Proper test for Employees and Senior Personnel sourcebook (FIT) may also be relevant.

In addition, the following checks are also recommended:

• find information about the AR’s professional reputation undertake criminal or credit checks, for example, whether the AR has unsuitable connections with any person (such as any person who has been convicted, or is connected with a person who has been convicted, of any criminal offence, including any spent convictions; particular consideration will be given to offences of dishonesty, fraud, financial crime or an offence under legislation relating to companies, building societies, industrial and provident societies, credit unions, friendly societies, banking, other financial services, insolvency, consumer credit companies, insurance, consumer protection, money laundering, market manipulation and insider dealing whether or not in the United Kingdom) (see FIT 2.1.3G);
• consider the nature (including the complexity) of any regulated activity that it carries on or seeks to carry on;
• establish clear onboarding procedures for ARs and document procedures and keep them updated;
• ensure that its affairs are conducted in an appropriate manner, having regard in particular to the interests of consumers and the integrity of the UK financial system; and
• make sure that there is minimal possibility of the business carried on by it, or to be carried on by it, being used for a purpose connected with financial crime.

Examples of the kind of general considerations to which the FCA may have regard when assessing whether an AR will satisfy, and continue to satisfy, the above points are whether the AR:

• can demonstrate that it conducts, or will conduct, its affairs with the exercise of due skill, care and diligence;
• has not been the subject of, or connected to the subject of, any existing or previous investigation or enforcement proceedings by the FCA;
• has not been refused registration, authorisation, membership or licence to carry out a trade, business or profession; or has not had that registration, authorisation, membership or licence revoked, withdrawn or terminated; or has not been expelled by a regulatory or government body; 
• has not been adjudged bankrupt or subject to any insolvency or winding-up proceedings; and 
• can demonstrate the appropriate knowledge and ability, training and competencies required to complete its tasks and perform its duties adequately. 

See guidance in COND 2.5.6.G.

2.3 Have you established that the appointed representative has no close links which would be likely to prevent your effective supervision

The FCA must be satisfied that the principal can effectively supervise the AR considering the structure of the group to which it belongs or to which it has close links, see SUP12.4.2R(2)(c). In making this determination, a firm should consider the guidance in COND 2.3.

Step 3 – Managing, monitoring and oversight

3.1 Do you have the necessary systems and controls to monitor the regulated activities being undertaken by the appointed representative?

Prior to appointment and on an ongoing basis, it is necessary to establish on reasonable grounds that the principal firm has adequate ‘controls’ over the AR’s intended activities. See SYSC 3.1 or SYSC 4.1.These controls should be appropriate to the nature, scale and complexity of the activities of the AR and take into account the risk of harm that could be caused in particular to consumers if those controls did not function well. The FCA wants to see that principals have systems and controls in place to effectively oversee the activity of the ARs and have embedded procedures to maintain this level of oversight, including by monitoring and regularly assessing the risk of harm to consumers and to market integrity.

See SUP 12.4.4.B, Principle 3, COND 2.5.6G(1) and (1a) and SUP 12.6.11G). 

Matters to consider in determining the adequacy of the systems and controls include the following:

• a review of the governance framework to ensure there is adequate board oversight and escalation procedures (eg, evaluate how you ensure continuation of service provision in the case of an unforeseen and sudden breakdown in the AR relationship);
• the principal’s ability to obtain sufficient (ie, relevant, reliable and timely) information from its AR to enable it to assess the impact of outsourcing on its systems and controls and to play its part in identifying, measuring, managing and controlling risks of regulatory concern;
• the principal must ensure its ability to have access to, and maintain the security of, the records of the AR which the principal will need to fulfil its oversight role adequately;
• there should be regular management engagement with the AR and all relevant individuals at the principal firm must be sufficiently knowledgeable and experienced to supervise the AR and make decisions – this responsibility rests with the senior management; 
• measures to identify and remediate any issues arising at the AR;
• establish processes for the collection, format and frequency of management information reporting (including being made aware of any changes at the AR which may affect the quality or integrity of the information provided), engagement with the AR and recordkeeping;
• establish and maintain an internal audit function which is separate and independent from the other functions and activities of the firm and which establishes, implements and maintains an audit plan to examine the adequacy and effectiveness of the firm's systems, internal control mechanisms and arrangements;
• establish processes for the escalation of issues, including service-level agreements where necessary; and 
• ensure the firm has adequate controls to effectively manage conflicts of interest.

3.2 Do you have adequate resources to monitor and enforce compliance of the appointed representative’s activities?

Prior to appointment and on an ongoing basis, it is necessary to establish on reasonable grounds that the principal has sufficient controls and resources to monitor and enforce an AR’s compliance with the relevant requirements that apply to its regulated activities. Resources in this context also include ensuring that the principal has sufficient personnel and expertise with sufficient time available to oversee the AR’s regulated activities.

The level of resource may vary (eg, with smaller ARs, principals should have the required levels of expertise to ensure their own products are sold in accordance with all regulatory requirements). In more complex ARs, however, the position is more challenging given the more serious impact of regulatory failure, and firms will have to devote resources to ensure they maintain the level of oversight required. For example, firms should assess whether their controls and resources are adequate if they, for example, identify an unusually high rate of turnover of the AR’s senior management or other staff, where they receive increased complaints about the AR, or changes are made to the AR’s business model or scope of appointment.

The obligations of SUP 12.4.2.R apply on an ongoing basis after appointment.

Step 4 – Ensure a written agreement is in place

4.1 Do you have you got a written agreement in place with the appointed representative?

A written agreement must be in place between the principal and the AR. The prescribed contract terms between principals and firms for the purposes of section 39 FSMA are set out in SUP 12.5. In particular, firms should ensure that the contract includes termination provisions and establishes obligations on the AR to provide the principal with the information needed to comply with the FCA reporting requirements. For further details please see How-to guide: The appointed representative regime explained – what it means in practice.

Step 5 – Notification and ongoing compliance requirements

5.1 Are you in compliance with all notification and reporting requirements to the FCA?

A firm that has one or more ARs must complete and submit the required form to notify the FCA of the appointment. The FCA must receive this form no later than 30 days before the AR starts to carry on regulated activities. Firms will need to factor this prior notice requirement into workflow and business planning. SUP 12.7 sets out the notification requirements that apply to a principal concerning its ARs. Among others, firms will need to notify the FCA of the primary reasons for appointment of each AR, the nature of the regulated activities its ARs are permitted to undertake, and whether they will be providing services to retail clients. In addition, principals will have to notify the FCA of any changes to their AR’s details or the regulated activities that the AR engages in (at least 10 days before the change takes effect) and provide complaints and revenue information for each AR to the FCA on an annual basis, within 60 days after the principal’s accounting reference date.

Principals will also be required to notify the FCA as to whether they provide, or intend to provide regulatory hosting services. This should be provided to the FCA at least 60 calendar days before providing those services. See How-to guide: The appointed representatives regime explained – what it means in practice.

5.2 Are you aware of all ongoing compliance and reporting obligations?

5.2.1 Annual review of the AR

Principals will be expected to conduct an annual review of the AR’s activities, business, senior management and overall financial status. They need to be satisfied that the AR is solvent and suitable to be an AR. They also need to consider that they will have adequate controls and resources to oversee their ARs. As principals are expected to keep the details of ARs on the financial services register up to date and notify the FCA of changes as they occur (SUP 12.7.7R). Note too, as the business of an AR grows, the principal has obligations to regularly assess whether it continues to have appropriate systems, controls and processes to oversee the AR activities in the context of its changing scale and complexity.  The record-keeping rules in SYSC 9 require firms to keep orderly records and SUP 12.6A.3R specifies certain circumstances where a firm must carry out an additional review such as where an AR's business model changes or the AR is appointed by another principal.  A written record of each annual review must be kept for at least 6 years.

5.2.2 Annual self-assessment

Principals will also be obliged to reflect on their own approach annually by maintaining a written record of the firm’s assessment of how it is meeting all requirements of compliance ie, self-assessment document, and agree the firm’s response to address any material issues identified. See SUP 12.6A. This review must be signed off by the board and this review and sign-off should be undertaken at least every 12 months.  This is not a high-level tick-box exercise and firms should thoroughly assess the effectiveness of their arrangements and the adequacy of their controls and resources.

The FCA, as part of its ongoing drive to minimise risk to consumer harm, could request a copy of this document from the principal, and firms should be aware that the FCA is stepping up supervision of principal firms.  It follows that the onboarding of new ARs is an area of supervisory interest for the FCA.  Firms should set up clear procedures to demonstrate compliance.  Good practice includes providing a manual which sets out a step-by-step guide to the sign off process together with a scoring system which identified areas of concern and a hierarchy of governance approvals.  Firms must retain a copy of each approved self-assessment for at least 6 years from the date of the approval. 

5.2.3 Contact details of FCA Supervision Hub

To contact the FCA’s Supervision Hub with AR enquiries:

• telephone: 0300 500 0597; 
• write to: Supervision Hub, The Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN; or
• email: [email protected].

Additional resources

FCA webpage:

Principals and appointed representatives
How to report Appointed Representatives data – information for principal firms
Principal firms who have Credit Broking permissions: Good practice and areas for improvement
Principal firms embedding the new rules for effective appointed representative oversight: Good practice and areas for improvement

Related Lexology Pro content

How-to guides:

The appointed representatives regime explained – what it means in practice 
The general prohibition – beware the consequences of breach 
Introduction to the UK financial services regulators

Checklists:

Preparing an application to the FCA or the PRA for a Part 4A permission 
Preparing an application to vary a Part 4A permission at the request of a firm

Reliance on information posted:

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