FCA puts inactive appointed representatives under the microscope

Firms need to oversee all regulated activities by ARs and accurately represent revenue generated and its origins, and when completing the REP025, principals need to report revenue generated by the AR and not attribute it to the principal. Explanations provided in Column F of the REP025 should be clear, not rely on unclear internal terminology, and not be applied indiscriminately to all ARs within the network that are not generating income from regulated activities. For example, entering "not trading" does not explain why the AR has not generated regulated revenue.

In some cases, 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 about whether the principal provided oversight for such mischaracterised transactions. In other cases, a 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. Principals must audit their classification practices as a matter of urgency.

Some principals allowed ARs to remain within their network for extended periods without carrying on regulated activities, without engaging with the AR to understand the reasons or reassessing whether the AR relationship remained appropriate. Principals who could not demonstrate effective oversight lacked a clear and up-to-date understanding of their ARs' business models and could not explain why their ARs had conducted no regulated activity for a period of time.

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, but it should not be used as an indefinite alternative to reassessing the appropriateness of the AR relationship. One principal described an AR as "suspended" in regulatory returns but had not clearly documented the rationale for the suspension, how long it was expected to last, or what the AR needed to do to be reinstated, and had also not notified the FCA of the suspension.

Some principals did not adequately monitor how ARs presented themselves to consumers, increasing the risk of misleading consumers about their regulatory status, and the FCA has observed a growing trend of ARs incorrectly referring to themselves as "Authorised Representative", which is not the correct designation. ARs that remain on the Register without conducting regulated activity can create consumer harm through the "halo effect", where FCA authorisation of the principal, and the AR's exemption from the authorisation requirement, can mislead consumers into believing protections exist which do not, particularly when the AR acts outside the scope of regulated activities.

Robust, compliant AR agreements are a foundational component of effective oversight and support principals in exercising appropriate control over AR activities throughout the lifecycle of the relationship. In some cases, AR agreements reviewed did not meet regulatory requirements, including 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.

The best-performing principals established the amount of expected regulated activity during AR onboarding, with greater monitoring built in at the early stages of the relationship or if those expectations were not met. Early-intervention principals identified ARs that were not carrying on regulated activities at an early stage, engaged promptly to assess the reasons, including whether the lack of regulated activity reflected business circumstances or wider suitability concerns, and used that information to determine whether to provide support or reassess the relationship.

Principals with strong oversight maintained ongoing, active monitoring of their ARs' businesses, including setting up alerts to identify changes in Companies House records, reviewing AR websites and marketing materials, and monitoring new regulated business leads. If an AR that is not generating revenue from regulated activities is in fact not carrying out any regulated activity, principals are expected to know this, to understand why, and to consider and document whether the AR relationship remains appropriate.

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Many principal firms are taking appropriate steps to manage risks arising from AR relationships, but the FCA's proactive regulatory engagement prompted positive change at 7 of the 14 principal firms 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 using robust data quality and governance; accurately report revenue and reasons for inactivity through REP025; and monitor the appropriateness of AR relationships, taking timely steps to ensure the Register remains up to date.