In a post earlier this year, which you can read here, we talked about the Appointed Representative (AR) regime as a continued area of focus for the regulator, says Kerry Berchem, practice development lawyer in the financial services sector team at UK law firm Burges Salmon.
The UK’s FCA sees a wide range of harms across all sectors where firms have ARs, often stemming from poor controls and poor oversight, and it is an area of heightened regulatory intervention activity. The focus of this post is Overseas Appointed Representatives (OARs) which present unique and additional regulatory challenges.
Latest from the FCA
In June, the FCA published a dedicated page to OARs, which flags up some of the specific regulatory expectations that any firms operating in this area will need to be mindful of.
What is an OAR?
OARs are entities or individuals that are not based in the United Kingdom i.e. they have their head office overseas. The FCA has observed the use of OARs notably in the general insurance, consumer investments and the wholesale markets sectors.
Why the concern?
The FCA is concerned that the use of OARs may enable access to UK markets by entities or individuals who do not have the permission to or have been refused permission to carry on regulated activities in the UK. Additionally, the known issue with ARs of inadequate oversight has an added level of complexity and associated risk where the arrangement also has an extra-territorial aspect.
Challenges that principal firms face
The FCA’s new page states some of the top-level challenges on communication and oversight that principal firms will encounter when dealing with OARs. These are:
• jurisdictional differences in legal, accounting and regulatory requirements;
• geographical distance; and
• differences in culture and language.
FCA’s expectations
The FCA expects principal firms with OARs to monitor and oversee those OARs in ways that specifically account for these additional challenges.
The FCA also expects principal firms with OARs to consider whether customers dealing with OARs will receive equivalent services, protections and outcomes as compared to those customers dealing with UK-based ARs. Where there is a gap identified in the provision of such services, protections or outcomes, the FCA expects that firms will give any affected customers suitable information to alert them to this.
In terms of ongoing monitoring, the FCA requires principal firms, on a reasonable and continuing basis, to establish that the activities of their OARs do not result in the undue risk of harm to consumers or market integrity.
Practical considerations for principal firms with OARs
The FCA’s page lists out some practical considerations for principal firms with OARs to consider including:
• the additional risks of having OARs when assessing relevant controls and resources as part of the required annual self-assessment;
• the application of the approved persons regime to OARs depending on the activities that are carried out from the UK and the length of time that any individuals performing consumer functions spend in the UK annually; and
• compliance with all relevant rules including, for example, the requirements for contractual terms for all ARs and the requirements pertaining to communications with consumers.
The FCA warns principal firms that if they are not able to adequately monitor the activities of an OAR, or the OAR does not carry out regulated activities in the UK, that they should consider terminating the agreement.
Conclusion
The FCA are committed to reducing the potential for harm to consumers by ensuring that principal firms understand their obligations under the AR regime and take a proactive approach to ensuring that their ARs and OARs are fit and proper and comply with all relevant rules.
By Kerry Berchem, practice development lawyer in the financial services sector team at UK law firm Burges Salmon
