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Here to help with Regulation and Compliance
23rd February 2016
Directly Authorised or Appointed Representative?
If you are a new firm just starting out and are wondering whether it would be better to be directly authorised or appointed representative to another authorised firm we can help you weigh up your choices and provide advice and support to suit your business.
In addition, firms that have appointed representatives should ensure that they have fully considered their role and responsibilities when it comes to their own Appointed Representative arrangements and may wish to read our article on Appointed Representatives: Principal Firm Responsibilities.
A firm that carries out regulated business on behalf of another directly authorised one is known as an Appointed Representative and the firm that they work for is known as their Principal Firm. In essence, an Appointed Representative acts as an agent of a Principal Firm.
Before an Appointed Representative may carry out any regulated activity, the Principal Firm must be satisfied that they meet all FCA requirements and are assessed and competent before making an application to the regulator.
Whilst Appointed Representatives are not directly authorised, it is the regulator that determines whether an Appointed Representative is approved to carry out business on behalf of a Principal Firm.
From a compliance perspective, it is the Principal Firm that holds all regulatory responsibility for any appointed representatives that they have since they are the ones directly authorised by the regulator.
Investment adviser firms have two options when they are establishing their business – either they will need to become directly authorised by the FCA or become an authorised representative of another firm.
With new regulation continuing to emerge and escalating requirements and the cost of compliance, this can sometimes be off-putting to new firms and one of the main reasons for choosing Appointed Representative over Direct Authorisation. However, with the right provisions in place, direct compliance responsibility shouldn’t be a factor to shy away from.
Principal Firms will often have provisions within the Agreement between the parties to not only recover the associated compliance costs for the arrangement but also a percentage of commission fees in relation to any business plus other fees such as desk fees, back office fees etc. Thus, firms should weigh carefully the cost of being an Appointed Representative alongside the cost of becoming Directly Authorised.
The activities that may be undertaken by an Appointed Representatives can only be those within the scope permitted by the regulator for their Principal Firm.
Appointed Representatives need to comply and understand with the regulatory requirements related to the business of their Principal Firm.
An appointed representative:
The principal takes regulatory responsibility for the appointed representative. It is also the principal that is ultimately accountable for the products its appointed representatives advise on, recommend and sell, including any liabilities that might arise for ensuring that the appointed representative complies with its regulatory responsibilities.
Being an Appointed Representative may be somewhat limited for some businesses as their scope of activities is restricted to advising and arranging transactions in investments (in line with their Principal Firm’s permissions) however, Appointed Representatives cannot manage investments. Thus any actual investment management would need to be undertaken by the Principal Firm, meaning that the business transacted belongs to the Principal Firm and not the Appointed Representative.
Some investment advisers prefer to write business for their own firms rather than for another so that they own their own investment management business – in this situation direct authorisation would need to be sought from the FCA instead.
Firms may choose to start off as becoming an Appointed Representative of another firm and later change to becoming Directly Authorised. However, remember that it is the Principal Firm that owns the business transacted under the Appointed Representative arrangement and upon ending the arrangement direct access to the client files will have to be passed to the Principal Firm.
In addition, dependent upon the provisions of the agreement between the parties, it is likely the ex-Appointed Representative firm may not to be allowed to carry on dealing with existing customers once the arrangement has ceased.
If you are looking at becoming an Appointed Representative or applying for Direct Authorisation, or would like to discuss any aspect of having Appointed Representatives please call our experienced compliance consultants who would be happy to help.
Directly Authorised or Appointed Representative