FCA imposes requirements on principal firm

On 24 May 2021 the Financial Conduct Authority (“FCA”) published a supervisory notice (the “Notice”) which it issued to Marshall Sterling Investment Management Ltd (“Marshall”) on 16 February 2021, which set out a number of requirements relating to their appointed representatives (“ARs”) as a result of concerns established by the FCA following its investigation into Marshall.

SUMMARY

The FCA’s decision to issue the Notice was predominantly due to Marshall failing to meet a number of requirements imposed on firms who are acting as principal for appointed representatives, namely:

  • failure in on-boarding the ARs;
  • inadequate ongoing monitoring of ARs; and
  • failure to terminate relationships with ARs.

As a result, the FCA’s view was that Marshall had failed to conduct its affairs with the exercise of due skill, care and diligence when on-boarding and monitoring its ARs.

ON-BOARDING

Notwithstanding a principal’s requirement to enter into an appropriate agreement to appoint its ARs and containing the relevant terms as required by the SUP chapter of the FCA Handbook, a principal must also establish that:

  • the AR is solvent;
  • the principal has adequate controls over the regulated activities carried out by its ARs and adequate resources to monitor and enforce compliance with the relevant requirements; and
  • they have conducted suitability assessments on any persons at the AR undertaking governing functions (i.e. fitness and propriety).

Where a principal is concerned that the ARs are unable to meet the above conditions, they must be proactive in taking steps to rectify the matter or terminate its contract with the relevant AR.

The FCA found that Marshall had failed to do the following:

  • carry out adequate assessments of fitness and propriety on the ARs’ directors and senior managers;
  • carry out risk assessments with respect to the ARs’ governance arrangements resulting in Marshall having improper on-boarding documents saved on file and failing to establish and monitor conflict of interests related to the ARs’ business model;
  • carry out any assessment or analysis of the credibility of the ARs’ business plans, their solvency or financial position; and
  • review or challenge the materials relating to investment products available on the ARs’ websites to ensure that they were fair, clear and not misleading.

MONITORING

As a principal firm, Marshall is required, on a continuing basis, to establish that the firm has adequate controls over its ARs’ regulated activities for which it has responsibility and resources to monitor them.

Through the FCA’s investigations, it was clear that Marshall’s monitoring of the ARs was incredibly limited as they did not have sufficient evidence to show that they were actively monitoring the ARs’ activities, or reviewing their websites or finances to ascertain the ARs’ financial standing and solvency.

TERMINATING

Marshall had policies in place to state that they would de-register ARs if they failed to submit applications for approved persons within a specified period of time or where no regulated activities have been undertaken within a specific period of time. However, despite two of Marshall’s ARs purportedly being inactive since their on-boarding, Marshall did not seek to deregister either AR with the FCA and nor did they have any evidence to support their justification for retaining the ARs appointment. Additionally, one of Marshall’s other ARs seemingly conducted regulated activities even without any approved person.

FCA REQUIREMENTS

Further to the FCA’s findings, they decided to impose the following requirements on Marshall which means that the firm must:

  • terminate its relationships with all three of its ARs;
  • not appoint any additional ARs without the prior written consent of the FCA;
  • secure all books, records and information related to the regulated activities carried on by it and its ARs and provide this to the FCA upon its request.

The FCA believed this action to be reasonable and necessary in order to achieve consumer protection as their investigations clearly noted a number of concerns, especially from a solvency and misleading financial promotions perspective, which could have led to very real financial consequences for consumers.

NEXT STEPS

The publication of the Notice serves as a useful reminder for any regulated entity currently taking on a principal role. It is clearly not sufficient to solely have the relevant documentation and policies in place with ARs – principal firms must ensure that proper compliance and operational processes are in place to appropriately on-board and monitor ARs throughout the duration of the principal and AR relationship. Where the principal firms are not satisfied that their ARs are meeting the regulatory requirements, then principal firms do need to take action to remediate or terminate those relationships which ultimately put consumers at risk.

To review the full Notice please click here.

For more information, and any guidance or advice on the FCA rules around principal firms and appointed representatives, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.

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