Written by Zhuan Faraj

On 21 October 2021, the FCA published its annual perimeter report for 2020-2021 (“Report”).

The perimeter report is published as part of the FCA’s accountability to Parliament and to support regular dialogue with the Government on the regulatory regime.

Among other things, the Report covers the following issues:

• Appointed representatives – The FCA considers there to be significant shortcomings in how well principal firms understand and comply with their regulatory responsibilities for their appointed representatives (“ARs”). The FCA has said that it will be carrying out targeted and proactive supervision where it considers the use of the AR regime to be a particular driver of harm. It will also intensify scrutiny of all principal firms and applicants which intend to appoint ARs, seeking permissions at the gateway. In a small pilot of this tighter approach, the FCA says that 50% of firms intending to appoint ARs have either withdrawn their applications or the FCA has decided to refuse them. The Report also cites the FCA’s ongoing work with the Treasury in this area.
• Financial promotions – The FCA considers that under current rules, ordinary investors are at risk of receiving financial promotions which do not have to comply with FCA rules, including for high-risk products. It is concerned that unauthorised persons are increasingly relying on exemptions in the Financial Promotions Order relating to “high net worth” and “sophisticated investors” in order to market high-risk investments. It has therefore expressed the view that significant changes are needed, particularly in reforming the relevant thresholds and the ability for consumers to self-certify.
• ESG data and ratings providers – While the provision of ESG ratings remains an unregulated activity, the FCA acknowledges that there are a number of potential harms including systemic impacts on consumers’ investment outcomes, a lack of transparency, and poor governance or systems and controls. The FCA’s work in this area will be referenced in its refreshed ESG strategy to be published later in autumn 2021 and followed by a feedback statement in the first half of 2022.
• Investment consultants – The Report notes that, pre-pandemic, the Treasury had planned to consult to bring investment consultancy services into the FCA’s perimeter. The FCA has expressed its continued support for such consultation, noting that such firms provide unregulated services that can significantly influence the investment strategies of asset owners and asset managers.

The report will form the basis of a formal discussion between Nikhil Rathi (the CEO of the FCA) and the Economic Secretary to the Treasury before the end of the year. The minutes of that meeting will be published.

The Report can be accessed through the FCA’s website and is available to read here.