THE FINANCIAL Conduct Authority’s (FCA’s) authorisation process is notoriously slow, with platforms waiting up to two years to get their full permissions.
So it is no surprise that some market entrants have opted to become an Appointed Representative (AR) instead.
By becoming an AR, a firm operates under the regulatory umbrella of an authorised company, which is known as the principal.
For example, Huddle Capital is an AR operating under Rebuildingsociety’s permissions. Growth Street started out as an AR under Resolution Compliance’s licence, before winning full authorisation in March 2018.
This has become a popular option for new platforms seeking a quick route to market. As an AR of Rebuildingsociety, Huddle Capital was able to gain authorisation to trade within just eight weeks. By comparison, Rebuildingsociety had to wait 28 months before it gained regulatory approval. Becoming an AR can also mean that a new platform can benefit from the experience and processes of the principal; even sharing software and other back-end processes.
“Becoming an AR means that you don’t need to reinvent the wheel when it comes to the policies and processes needed to run a regulated business, as the principal will provide these or give significant guidance on their development,” said Kylie-Jo Greef, compliance manager at Rebuildingsociety. “Our ARs are able to learn from us and get up and running quicker.”
But while the benefits are clear for the AR platform, on-boarding an AR represents a substantial risk for the principal. According to the FCA’s rules, the principal is responsible for reporting on the AR’s activities in its own FCA submissions, and this includes strict adherence to client money protection and contemporary compliance. With a host of new regulations on the horizon for the P2P market, this could lead to an increase in the bureaucratic burden for principal platforms.
“A principal will be fully responsible for the acts and omissions of its AR as if they were the acts and omissions of the principal themselves,” confirmed Marc Piano, an associate at the law firm Fox Williams. “Consequently, the principal is required to undertake certain pre-appointment checks on the proposed representative, as well as ensuring that it is duly licensed for the proposed regulated activities the representative wishes to undertake.
“As a principal will always be responsible for the acts and omissions of an AR, an AR arrangement can be time consuming and costly for the principal to arrange, enter into and monitor, as well as increasing exposure and potential liability for the principal during the course of the arrangement.”
The FCA’s own guidelines on the liability of the principal are “by no means exhaustive”, said Greef, underlining the importance of creating extremely detailed contracts ahead of the on-boarding process. Many principals also include a caveat in these contracts which makes it clear that the AR is entering into a short-term agreement only.
“In our experience, AR agreements are not usually intended to be a long-term arrangement, and the representative is unlikely to have much bargaining power during negotiations,” added Piano. “Many businesses that choose to go down the AR route do so as an interim measure, with the goal of eventually being directly authorised.”
To protect the principal, Fox Williams always insists that there is at least one approved person at the AR who is already on the FCA register.
This article featured in the September issue of Peer2Peer Finance News, now available to read online.