Appointed Reps – writing on the wall?

Life as an Appointed Representative (AR) is going to get harder. FCA continues to turn the screws on their regulated Principal firms, who provide ARs with the regulatory umbrella.

On 20 May it issued a “Dear CEO” letter to the Chief Executives of Principal firms in the investment management sector, reminding them of their responsibilities to supervise their AR firms. This letter follows a very similar letter written in July 2016 to CEO’s of Principal firms in the general insurance sector.

Clearly, FCA has formed the view that some Principal firms are not carrying out their responsibilities to supervise their ARs in a sufficiently robust manner.

“Our review identified significant shortcomings in relation to principal firms’ understanding of their responsibilities…”, said Megan Butler, Director of Wholesale Supervision. Butler reminds CEOs that the Principal firm must, inter alia, “take reasonable steps to oversee their ARs effectively…”

Traditionally seen as a soft alternative to FCA authorisation, what was intended as an adjunct to a regulated firm’s business has now become a business in itself.

As a consequence of FCA’s greater interest, two things will happen. Firstly, Principal firms will review their oversight mechanisms to ensure that they can evidence clear controls over their ARs. This will probably lead to an increase in the fee they charge the AR. As a consequence of this, AR firms should consider whether the increased fee they pay to the Principal represents value. Direct authorisation by FCA can be, for such firms, a cheaper alternative.

Fulcrum Compliance has direct experience of both sides of this dilemma. Do contact us to discuss further.

No retail, no worries?

Firms in the professional sector have always seem themselves as further away from the centre of FCA’s radar screen than their retail facing peers.

It’s true that much of FCA’s policy agenda over the past years has focused on protecting the retail customer. Initiatives such as Treating the Customer Fairly, the re-writing of the client money rules and the retail distribution review can be seen in this light.

But now FCA is forcing other firms to catch up. In another “Dear CEO” letter issued in April, FCA reminded professional firms that some of its retail centric policies applied just as much to them, citing as a prime example the compensation arrangements which still operate in parts of this sector.

One of the key “drivers of harm”, said Simon Walls, Head of Wholesale Markets, are “compensation arrangements which incentivise poor conduct by linking broker remuneration directly – and potentially exclusively – to the commission they earn”. These “allow little or no scope to recognise non-financial indicators of performance”, he said.

FCA is looking for firms to have a more rounded assessment of performance where reward is not just based on sales. Indeed SMCR (see our previous Newsletters) requires a broad-based appraisal of staff to ensure their ongoing fitness and propriety.

First still using “eat what you kill” remuneration models would do well to review these for their upcoming budgetary cycles.

You too?

Those who have attended Fulcrum Compliance’s training sessions will be familiar with the case of Jonathan Burrows, the Blackrock investment manager banned for life in 2014 for train fare dodging.

As Tracey McDermott, FCA’s then Director of Enforcement said at the time, “Approved persons must act with honesty and integrity at all times and, where they do not, we will take action.”

Firms should be aware of how much the conduct debate has moved on since then. In 2014 fare dodging was seen as a financial crime incompatible with the standards expected. Now, a far greater range of behaviours is seen by FCA as not compatible with “good conduct”.

In September 2018 Megan Butler (see above) wrote that FCA “view sexual harassment as misconduct which falls within the scope of our regulatory framework” and that “sexual harassment and other forms of non-financial misconduct can amount to a breach of our Conduct Rules”.

These remarks were echoed as recently as this June by Nausicaa Delfas, FCA Executive Director of International at the Women in Finance 2019 Conference.

The reason for FCA’s interest is its view that an atmosphere of bullying and harassment is not conducive to an open, questioning culture and that diversity is fundamental to business success and the reduction of failure.

So remember that when you’re looking at your post SMCR appraisal processes.

SMCR – second quarter down

Following the logic of our March Newsletter, firms’ implementation of FCA’s Senior Managers and Certification Regime (SMCR) should now be approximately 50% complete.

By the end of June, firms should have concluded the steps of identifying their Senior Managers and their Certification Staff, and have for the former draft Statements of Responsibility. Hence 50% complete.

Once these are done, firms can turn to the processes they have for ensuring the fitness and propriety and training and competence of all staff covered by the regime. We discussed what this might look like in our March Newsletter.

This should entail relatively minor adjustments to most firms’ existing processes. Fulcrum Compliance will be incorporating these ideas in its update training, which will be delivered this year.


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