An Appointed Representative (AR) is a person or company, permitted to carry on specific types of regulated financial activities under the licence of a Financial Conduct Authority (FCA) authorised firm, known as their ‘principal’. Asset management companies commonly use ARs as part of their business model.
During the course of a Principal-AR relationship, certain drivers such as growth and expansion objectives, might lead an AR to seek to obtain full authorisation in their own right. However, the challenge for such firms is that the authorisation process is rigorous and labour-intensive, and ARs seeking to apply can expect long delays and the risk of rejection.
We recently outlined the most common reasons for authorisation failures by asset management firms in a previous article. Now, in this blog, we will go a step further and identify the main things ARs should consider before submitting their application.
Why should ARs apply for authorisation?
ARs are permitted to carry out certain regulated financial activities on behalf of one or more ‘principal’ firms. The principal is responsible for all of the AR’s activities and agrees what functions they perform. But if an AR moves to being an authorised firm, it becomes empowered to carry out regulated financial activities with more freedom for a wider range of clients.
The latest statistics about ARs reflect a challenging environment in the UK. The FCA’s 2022-23 annual report noted that 35,000 ARs were in operation last year, which is a reduction of 19%, from 43,000 in 2020.
What must an AR do to seek authorisation?
The first step in moving from an AR to an authorised firm is to give notice to the principal firm(s) for whom the AR is currently operating. Such a request is perfectly reasonable, and the FCA notes that “applying and getting approved for authorisation doesn’t override any contractual obligations you owe to your principal”.
The way this change in relationship is negotiated is important and ARs should discuss three main topics with their principal(s):
- A reference: An AR should inform its principal(s) of its plans and note that it may need them to provide a reference, and that the regulator may contact them to obtain one. Having this conversation in good time can help to speed up the application by avoiding delays when the request arrives.
- Future access: An AR should agree with its principal how it can gain direct access to client files from its time as AR in case they receive a complaint from a client in future. The FCA also expects firms to “put an agreement in place in respect of future liabilities that arise from an AR’s actions”.
- Future customer dealings: The AR should check that the agreement with its principal allows it to continue dealing with the AR’s customers in the future.
What should ARs know before applying for authorisation?
ARs need be aware that the authorisation process is extremely onerous, and the regulator expects firms who apply to be “ready, willing and organised”. Moreover, the whole process can take a long time. A complete application for a firm seeking to become an authorised MiFID firm might take anywhere from 6-12 months to be approved, and only if the FCA considers it to be ‘complete’.
Principal firms are responsible for the activities of ARs, so when ARs become regulated firms they will take on all of these responsibilities, including:
- Compliance with the full suite of the FCA’s regulations.
- Professional indemnity insurance.
- Liabilities of the business.
- Ensuring their senior management functions are carried out by appropriate people who are approved by the regulator.
As these responsibilities will be new to ARs, they will often need to put in place new systems and controls to fulfil their obligations and meet the FCA’s standards. This includes identifying and understanding their regulatory obligations, then demonstrating that they are capable of fully complying with those requirements. The regulator will expect to see that this is in place at the point of application, so a lot of preparatory work is necessary.
How can ARs improve their chances of a successful authorisation?
It is important that firms are well-prepared when they apply for authorisation. But this is not always the case, and the FCA recently released a paper because of its concerns about receiving numerous poor applications for authorisation, which resulted in rejection or withdrawal.
For ARs, getting your application right first time can save you significant time and effort. Firms should ensure they avoid seven common errors identified by the regulator:
- A lack of experience and qualifications within senior management.
- Failing to meet the requirement that “the mind and management” of the firm needs to be in the UK.
- A business model which exposes clients to an “unacceptably high” level of risk, and an inadequate process for identifying and mitigating risks.
- Outsourcing activities to third parties without retaining ultimate accountability for their compliance.
- Undeclared or unidentified conflicts of interest between the interests of the client, the asset management firm, and related parties.
- Failure to protect consumers.
- Applications which show a lack of preparedness, including proposed changes to the business model during the process.
If you are an AR considering becoming authorised, fscom can help you to prepare the best possible application, contact us here.
