FCA Considerations for AR Principals
On 2 August 2016, the FCA had issued an alert following an increase in cases of introducers having an inappropriate influence on business carried out by authorised firms. This alert expands on that. It also highlights the risks to a Principal of not having adequate oversight of its ARs. As Principals, firms are responsible for the regulated activities of ARs and the FCA expects them to consider the following risks and act upon them where relevant.
The business carried out by a Principal and its ARs can be inappropriately influenced by an introducer. This can include an introducer exercising substantial influence over the final investment choice and undertaking tasks central to the advice process. For example, the FCA has seen instances where the referral from the introducer is made with a clear investment desire expressed by the customer and documentation already completed. In accepting business from an introducer, a Principal must meet its regulatory requirements as set out in our Handbook. It must ensure it understands and mitigates these risks and has adequate oversight of its ARs and introducers. Otherwise, it may result in the firm and its customers experiencing harm (e.g. as a result of a scam).
An AR is given an FRN as a result of the appointment by their Principal. An AR may wrongly use its FRN to carry out additional regulatory activities separate from the business arrangement they have with the Principal. Therefore, there is a risk that customers may be misled into believing that the AR has the authority to act because they have an FRN. As a result, a Principal should be aware of all of the activities carried out by its ARs.
A Principal should also consider why it is appointing an AR and whether this is necessary for the activities they will be carrying out. The FCA has found Introducer Appointed Representatives being appointed when their only business is to generate investment introductions. In this case, they may not need to be authorised for this type of activity (for example, if the introduction is to an authorised person who will provide the client with independent advice or will exercise independent discretion in relation to the investment or class of investments that are the subject of the introduction).
The FCA has found some Principals undertake insufficient due diligence on their ARs and introducers and there is a risk customer may suffer financial harm as a result. This is because some of the underlying investments may be controlled by or closely linked to introducers or ARs. Some of the investments may be badly run while others may be outright scams. Firms may find checking Companies House’s website useful when considering AR and introducer relationships.
The FCA has found some Principals are not always monitoring the type, volume and source of business being submitted by its ARs. A Principal needs to have a well-structured monitoring process in place to identify business trends which could result in risk to customers including poor investment outcomes. In addition, if an AR has not submitted any business or generated introductions for some time a Principal should consider why they should remain registered.
Further, a Principal should ensure that no-one at their ARs is appointed for a role without prior FCA approval where required. For example, in designated investment business all directors of ARs need prior approval from the FCA.
A failure by a Principal to identify all persons with significant control or senior management responsibilities/functions may mean it is not aware of any potentially inappropriate influence by other parties.
As a Principal, firms should review and consider:
- the introducer relationships firms and their ARs have to determine if the firm is under undue influence;
- AR relationships to ensure they remain necessary, appropriate and relevant for the firm’s type of business;
- processes in relation to persons with significant control and senior management responsibilities/functions within ARs;
- whether AR and introducer due diligence and monitoring processes are adequate;
- whether they need to take any additional steps to ensure the actions of ARs are compatible with their obligations as an AR and allow them to meet their regulatory responsibilities;
- the alert issued on 2 August 2016
FCA work in this area is continuing and it will take action where it identifies non-compliance with its requirements. It expects firms to consider the content of this alert and take appropriate action. Whilst this alert applies to all Principal firms regardless of sector, the FCA will in due course issue a further communication to Principal firms in the Investment Management sector. It will highlight the findings from the multi-firm review of Principals and Appointed Representatives, for which the firms concerned received two questionnaires in Q1 2017.
How can Thistle help?
Thistle will continue to keep this area under review and will issue further updates where necessary. For more information, email email@example.com or call 0207 436 0630.