The FCA recently published its latest Dear CEO letter on the supervision of appointed representatives (ARs).
This is the second time the regulator has criticised the way in which principal firms manage ARs.
In July 2016, the FCA published similar findings about the general insurance sector.
This latest letter focuses on the investment management sector, spanning firms involved in promoting and managing alternative investment funds, asset management, wealth management, contracts for difference providers and fund advisory activities.
But the findings equally apply to any firm who has or is considering appointing an AR.
You'll be aware that ARs are not directly regulated by the FCA. Instead, they provide regulated activities under the supervision of an authorised firm. This authorised firm acts as the principal, and is responsible for all activities and liabilities.
The regulator considers a breach by an AR to be the same as if the principal firm had breached the rules itself, regardless of any contractual agreements made between the two.
In the Dear CEO letter, the FCA says it found that most principal firms it reviewed had “weak or underdeveloped” governance arrangements. In particular, it identified a lack of effective risk frameworks, internal controls and resources.
A majority of the failures related to monitoring, and the lack of ongoing monitoring to ensure that ARs comply with the principal firm's policies and procedures.
We live in times where resources are stretched and compliance is sometimes seen as a cost centre, rather than a cost benefit.
Yet if you do not put in place appropriate controls to monitor your AR’s activities, then the FCA will find you liable for any failings it identifies. It may also require you to cease the relationship.
The regulator was also concerned that where firms don't effectively monitor their ARs, there's a risk the ARs may stray outside of the principal’s area of expertise or permissions.
One firm, out of the 15 visited by the FCA, found their ARs to be trading outside of the principal’s permissions and were in breach of the FCA’s general prohibition rules.
The regulator also identified that several principal firms did not identify or record conflicts of interest on their conflicts of interest register. This is despite the existence of, in the FCAs opinion, “some obvious conflicts”.
Where there was monitoring, the FCA found that day-to-day monitoring staff had insufficient skills or experience to do this monitoring effectively.
What should you do now?
As this is now the second review the FCA has completed on ARs in the last three years, we can expect further reviews and visits to principal firms shortly.
As such, if you have any ARs working for you, we would recommend:
- Completing a review of your controls around your AR relationships;
- Ensuring the team responsible for day-to-day monitoring of your AR or ARs has sufficient resources allocated to it;
- Review your risk framework to ensure it remains up to date;
- Revisit your conflicts of interest register to confirm all conflicts have been correctly identified and recorded.
ARs are a useful way to expand your firm's national or international reach and can bring great benefits to a principal firm.
But as this Dear CEO letter goes to show, you must make sure you have adequate controls in place to monitor the relationship effectively.