AR Networks – a second FCA alert

As compliance becomes more demanding for consumer credit firms, it is inevitable that many smaller firms will seek to join networks.

Becoming an Appointed Representative (AR) to a regulated Principal is an attractive option. It allows a firm to trade even where having a dedicated compliance function may not be viable. This does not mean that a firm can completely discharge its responsibility. Principals will still expect their ARs to operate in a way that is compliant.

> More on ARs from FCA

For Principals there is significant risk in taking responsibility for the conduct of others. Oversight and controls must keep up with regulation and the needs of the network. Due diligence of ARs is critical to avoiding regulatory action or censure. Before taking on an AR the Principal must satisfy itself as to the history and ownership structure of the firm. This mitigates risk and prevents so called ‘phoenix firms’ from re-entering the market. The FCA will take a dim view of Principals who have not completed stringent enough checks.

 

A second FCA alert

In November last year (2017), the FCA issued a second alert about AR networks and customer detriment. As more consumer credit firms adopt the AR/Principal model, it is important to learn from the mistakes of other sectors, where this model is common.

The alert reiterates potential conflicts of interest between ARs, introducers and underlying finances. The FCA appeals to Principals to “review and consider” their network relationships. “Undue influence” and “badly run investments” were focus points.

There is likely to be more pressure on networks as the FCA pursues its concerns. But ‘weeding-out’ unscrupulous firms will encourage a healthier environment for all.

 

Mutual benefits

For AR frameworks to work, Principals and ARs both need to play their part.

ARs need to be transparent and co-operative. They must provide meaningful management information and allow appropriate access to their business. They must also be proactive in understanding and operating within the regulations.

Principals must establish robust contracts with ARs. This includes monitoring their activity and providing adequate support with compliance. Principals also have the critical responsibility of regulatory returns and FCA liaison.

As Principals grow their networks, they need to ensure that systems and controls keep up. This includes professional indemnity and holding cash reserves to meet liabilities.

Done in the right way AR networks can be robust and viable; meeting the needs of the Principal and allowing AR firms to prosper.

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