By Pritpal Virdee

On 11 July 2023, the FCA published a new webpage providing information for principal firms operating as “regulatory hosts”.

The FCA defines a “regulatory host” as “a principal firm that typically carries out little or no regulated activity” and instead “oversees the use of its permissions by Appointed Representatives (ARs)”.

The AR regime has been the topic of much discussion as a recognised potential source of serious harm to the financial services system. Last August, the FCA published a policy statement (PS22/11) on improvements to the AR regime setting out its final rules (read our blog on this here), and the FCA have identified the need for more stringent testing of firms that use the AR regime as an action point in its Business Plan for 2023/24, with the ultimate end goal of reducing the opportunities for misconduct that might cause serious harm by securing improved oversight by “regulatory hosts” of ARs (read our blog on this here).

Echoing this theme in the new webpage, the FCA acknowledge that “regulatory hosts receive more complaints and create more FCA supervisory cases on average than other principals”. The webpage refers to three of the key responsibilities that “regulatory hosts” must fulfil to ensure compliance with FCA standards:

• Sufficient resources: emphasising that the “regulatory host” retains ultimate responsibility for the oversight of its ARs (even where the compliance and monitoring functions are outsourced) the FCA recommends a non-prescriptive list of measures to test the compliance of ARs with the requirements, these include but are not limited to: regular meetings, file audits, and risk reviews of management information and data;
• Records and evidence: the FCA stresses the importance of good record keeping to evidence the procedures and controls around onboarding, monitoring and oversight, particularly in cases where conflicts of interest may cause delays in addressing harm; and
• Effective systems and controls: the FCA encourages the use of technology to ensure the effective oversight of ARs.

Going forward, the FCA will continue to scrutinise “regulatory hosts” to ensure the AR regime is fit for purpose, functions effectively, and permits only those “regulatory hosts” that comply with the relevant rules. This will include stopping unsuitable applications at the authorisations gateway and taking enforcement actions in cases where harm is discovered. The effects of the FCA’s refocussed approach are already being seen. In its latest annual report, the FCA announced that the number of active AR firms has fallen by 19% from 43,000 in 2020 to 35,000 at the end of 2022/23. It will be interesting to see whether this trend continues as firms favour alternative business models or whether this represents a temporary recalibration of the AR industry as firms that fail to meet the requirements exit the market.