Will becoming an ARs still help you get to market quicker?

An oft touted benefit of becoming an Appointed Representative (AR) is that it enables FinTechs to accelerate to market quicker. This generally is the case, but will such attractiveness remain with new FCA  proposals in CP21/34?

For a relatively low cost (business economics willing) and with limited oversight, UK FinTechs and other firms have been able to offer regulated investment, insurance and consumer credit products to their users. 

Under the current AR regime, FinTechs pay down regulatory risk by effectively transferring it to their principals who take the wrap for any compliance failures.

The AR regime has proven quite the success. For an indication of scale, there’s around 40,000 ARs operating under 3,600 principals. That’s almost as many ARs as there are firms directly regulated by the FCA at ~51,000.

A once convenient arrangement for fledgling FinTech founders, the rapid proliferation of ARs has now caught the attention of the FCA and the Treasury who have issued a Call for Evidence. 

CP21/34 proposes:

• Additional information requirements from principals on ARs’ business models, revenue, complaints and regulated/unregulated activities
• Annual fit and proper checks for ARs’ management
• AR agreements must include termination clauses for principals that feel they can no longer effectively supervise an AR due to its rapid growth
• A requirement for principals to carry out annual reviews and make written self-assessments
• Further guidance on ‘adequate’ controls

What’s driving this change?

On average principals generate 50-400% more complaints and supervisory cases than non-principals. 

The FCA is intervening now because it now considers there to be significant evidence of harm to consumers and markets.  Across thematic reviews and supervisory work, the FCA  found insufficient oversight and inadequate controls over the regulated activities of ARs.

The verdict - yes...but

The AR regime is not being removed altogether. The FCA recognises its importance to markets, particularly from an innovation and competition perspective. So we would still expect becoming an AR to prove attractive for firms looking to get faster to market.

Whilst the proposed changes (which are likely to be implemented as consulted on) will make life as an AR harder, it is still more likely that a firm could start offering regulated services quicker than waiting up to 12-months for an FCA license.

What to expect next

Notwithstanding that we’re unlikely to see the rules coming into force until H2 2022, executives can expect an increase in AR fees next year to offset regulatory risk. Firms applying for FCA authorisation or registration should expect increased scrutiny if their business model involves taking on ARs, particularly around suitability of controls and resources.

Both the FCA and Treasury’s consultations close on 3 March 2022. 

We are happy to support firms with articulating their views on the Appointed Representatives regime to the regulators - just get in touch.