Managing potential risks from inactive appointed representatives

There are a range of possible reasons why ARs do not carry out regulated activities. Where this is the case, principals still need to have effective oversight of their ARs and cannot rely on transaction oversight as a source of information. An unexplained lack of reported regulated activity is an indicator of weaknesses in principals’ governance, monitoring and oversight, and risk management of its ARs. Where such weaknesses exist, there is an increased risk of consumers being misled and suffering harm.

This review gives examples of good practice and areas for improvement we have seen in our supervisory work related to inactive ARs. As principals are responsible for AR oversight and liable for harm caused by their ARs, we expect principal firms to:

• Consider AR arrangements where ARs are not routinely carrying out regulated activities and reflect on whether oversight, monitoring and governance practices remain appropriate.
• Provide accurate and clear explanations in REP025 regulatory returns where ARs have not carried out regulated activities during the specific reporting period.
• Take timely action to terminate AR relationships where they are no longer appropriate and notify the FCA when the status of the relationship changes.

This publication will be of interest to principal firms operating with ARs including Introducer ARs (IARs).

This builds on previous publications including PS22/05[1], PS22/11[2] and our 2023 publication on Improving the Appointed Representative regime through greater use of data[3].

Using 2 years of REP025 regulatory return data (REP025), which includes information collected from principals about AR complaints and revenue generated, we assessed how principal firms oversee ARs that carry on no regulated activities for some time. Our work focused on whether principals: 

• Could clearly explain the absence of income from regulated activities reported through REP025.
• Were accurately reporting AR activity to the FCA.
• Could demonstrate effective oversight of the AR’s business.

Lack of AR regulated revenue reported to the FCA

Principals with certain business models and in some sectors are more likely to report ARs that carry on no regulated activities for a period of time. In many cases, this reflected the nature of the AR’s business. For example: 

• Retail finance providers, credit brokers, and corporate finance firms – ARs may act as intermediaries where regulated activity occurs only occasionally because their main business focuses on unregulated activities. In some cases, commission related to regulated activity is improperly attributed to another party, such as a lender. We found instances where commission paid to ARs in relation to regulated activity is incorrectly recorded as unregulated income, making ARs appear inactive when they are not – and raising questions of whether the principal provided oversight for such mischaracterised transactions. In other cases, ARs primarily carry-on non-regulated finance activity alongside other business but remain subject to appropriate oversight.
• Funeral plan providers – for ARs that are funeral directors, regulated activity is not their core business. As a result, periods with no reported regulated activity are more common in this sector than in others. This heightens the importance of principals understanding how and when regulated activity arises within the AR’s wider business. 
• Alternatives and asset management firms – in these business models, regulated activity may not generate income for extended periods, with revenue accruing over longer periods. Although such ARs may appear inactive based on REP025 reported regulated revenue alone, this did not necessarily reflect a lack of regulated activity or engagement. 

In other cases, this lack of reported activity reflected weaknesses in the way principals classified or reported regulated and non-regulated business through the REP025, rather than an absence of regulated activity itself. Firms need to oversee all regulated activities by ARs and accurately represent revenue generated and its origins. When completing the REP025, principals need to report revenue generated by the AR and not attribute it to the principal.

Explanations provided in the REP025 return (in Column F) should be clear, not rely on unclear internal terminology and not be applied indiscriminately to all ARs within the network which are not generating income from regulated activities. For example, multiple principals entered ‘not trading’ or ‘not introduced business during this period’ as the explanation for AR inactivity. However, this does not explain the reasons why the AR has not generated any revenue from regulated activities. We expect firms to explain the reasons for inactivity in simple terms when completing the REP025. Our REP025 FAQ pag[4]e[4] provides helpful information to principals to support accurate reporting.

Good practice

• Clear expectations set at onboarding: The principal establishes the amount of expected regulated activity during AR onboarding, with greater monitoring in early stages of the relationship or if those expectations are not met.
• Clear understanding of AR activity: Principals understood and could explain why ARs were not carrying out regulated activities for some time. The main reasons were that ARs:
  • Had not yet started undertaking regulated activity.
  • Expected their regulated activity to develop over time.
  • Undertook primarily non‑regulated business.

If an AR that is not generating revenue from regulated activities is in fact not carrying out any regulated activity, we would expect principals to know this, to understand why and consider and document whether the AR relationship remains appropriate.

• Active and data-led oversight: Principals with strong oversight maintained ongoing, active monitoring of their ARs’ businesses. This included: 
  • Alerts to identify changes in Companies House records.
  • Reviewing AR websites and marketing materials.
  • Monitoring new regulated business leads.
• Early intervention: Principals identified ARs that were not carrying on regulated activities at an early stage. Principals engaged promptly to assess the reasons, including whether lack of regulated activity reflected business circumstances or wider concerns about suitability. They used this information to determine whether they needed to provide support or reassess the relationship. 

Areas for improvement

Principals who could not demonstrate effective oversight lacked a clear and up to date understanding of their ARs’ business models. They could not explain why their ARs had conducted no regulated activity for a period of time.

Lack of engagement with inactive ARs

Some principals allowed ARs to remain within their network for extended periods without carrying on regulated activities. They did not engage with the AR to understand the reasons for this or reassess whether the AR relationship remained appropriate.

Good practice

Suspension may be appropriate in limited circumstances, such as when the principal is actively investigating the AR and there is a realistic prospect of resolution. However, it should not be used as an indefinite alternative to reassessing the appropriateness of the AR relationship. Where principals suspend an AR, they should make the relevant notifications in line with SUP 12.7.7R. 

Where concerns are not resolvable within a reasonable timeframe, principals should consider whether they need to take further action, including termination. 

Insufficiently monitoring consumer-facing materials

Some principals did not adequately monitor how ARs presented themselves to consumers. This increased the risk of misleading consumers about their regulatory status, particularly where ARs had not actively carried on regulated activities for some time. 

We have also observed a growing trend of ARs incorrectly referring to themselves as ‘Authorised Representative’. This is not the correct designation for an AR.

Good practice

Firms should ensure that any references on AR websites use proper terminology to avoid confusion. We encourage principals and ARs to review the relevant rules - GEN 4 Annex 1 sets out the statutory status disclosure for ARs as required by the rule in GEN 4.3.1 R.

AR agreements need to meet regulatory requirements

Robust, compliant AR agreements are a foundational component of effective oversight and support from principals in exercising appropriate control over AR activities throughout the lifecycle of the relationship.

In some cases, AR agreements we reviewed did not meet regulatory requirements. This included principals not clearly accepting responsibility for the regulated activities carried on by ARs and not including required terms set out in or under Section 39 of FSMA and SUP 12.5. Where agreements were non-compliant, we asked principals to amend them and provide assurance deficiencies had been addressed.

Many principal firms are taking appropriate steps to manage risks arising from AR relationships, including where ARs carry on no regulated activities. However, our proactive regulatory engagement prompted positive change at 7 of the 14 principal firms we reviewed – with 11 ARs offboarded and principals strengthening their monitoring arrangements. Following this review, principals should:

• Actively and appropriately engage with their ARs through oversight, and use robust data quality, and governance, including additional measures when an AR is inactive.
• Accurately report revenue generated by the AR and any reasons for periods of inactivity through the REP025 regulatory return.
• Monitor the appropriateness of their AR relationships and take timely steps to ensure the Register remains up to date and the principal's risks are mitigated.