Should you be an appointed representative or apply for FCA authorisation?

What is an appointed representative?

Section 39 of the Financial Services and Markets Act 2000 (FSMA) lets a business carry on certain regulated activities without its own authorisation if it is an appointed representative (AR) of an authorised firm, known as its principal. The AR must have a contract with the principal that permits or requires it to carry on business of a kind the regulations allow, and the principal must have accepted responsibility for that business in writing. If those conditions are met, the AR is an exempt person for that business.

The principal is responsible for anything the AR does or fails to do in carrying on that business, to the same extent as if the principal had expressly permitted it. That is why principals set their own requirements for ARs, monitor what they do and can end the arrangement. ARs appear on the FCA register linked to their principal.

Some ARs are introducer appointed representatives, whose role is limited to making introductions and distributing certain promotions. Others carry on a wider range of regulated business within what their principal allows.

What does the FCA expect of principals?

The FCA’s rules for principals are in SUP 12 of its Handbook. A principal must be satisfied before appointing an AR that the AR is suitable and that the principal can oversee it properly, and it must keep that under review. From December 2022 the FCA tightened what it expects. In general terms the changes put more weight on principals assessing and monitoring their ARs, reviewing each arrangement regularly, giving the FCA more information about their ARs and having enough resources to oversee the network they take on. The FCA has been critical of principals that appoint ARs without real oversight.

For an AR this means the principal is not a formality. Expect checks before appointment, ongoing reporting, limits on what you can do and say, and a principal that can end the arrangement if it is not comfortable with your business.

Which activities can be carried on as an AR?

Not every regulated activity can be carried on as an AR. Regulations made by HM Treasury set out the kinds of business an AR can be appointed for. In broad terms they are aimed at intermediary business such as arranging, advising and credit broking. Some activities are not available through the AR route at all, and a business whose model depends on one of them will usually need its own authorisation for that part. The principal must also hold the relevant permission itself, and many principals limit the activities they are willing to take on.

Payment services and e-money are mainly governed by the Payment Services Regulations 2017 and the Electronic Money Regulations 2011 rather than the Regulated Activities Order, so the AR route does not apply to them. Those regimes have their own arrangements, including acting as an agent of an authorised payment institution.

What does direct authorisation involve?

Direct authorisation means applying to the FCA for permission under Part 4A of FSMA to carry on the regulated activities you need. The FCA must be satisfied that your firm meets, and will continue to meet, the threshold conditions in FSMA. These look at matters such as your resources, the suitability of the business and the people running it, and whether the firm can be supervised effectively. People in senior roles generally need FCA approval, and depending on the activities there are rules on capital, systems and controls, conduct and reporting.

An authorised firm holds its own permission, deals with the FCA directly and does not depend on a principal to keep trading. It also carries the full cost and responsibility of its own compliance. For more on the application process, see directauthorisation.com.

How do the two routes compare?

Neither route is better in every case. Some businesses start as an AR and later apply for their own authorisation, which needs a full application because AR status does not convert. For more on the AR route, see appointedreps.com.

Operations and marketing

Both routes answer the operations question under section 19 of FSMA. Marketing is a separate test under section 21. An AR is not an authorised person, so its financial promotions generally need to be approved by an authorised firm unless an exemption applies. Since 7 February 2024 an authorised firm generally needs a specific FCA permission to approve promotions for unauthorised businesses, with limited exceptions that include promotions of its own appointed representatives. A directly authorised firm can communicate its own promotions, subject to the FCA’s rules in COBS 4. See the operations test and the marketing test.

Common misunderstandings

When a written opinion helps

Before choosing a route, it is worth being sure you need one. Some businesses look at AR arrangements or authorisation when their activities may in fact sit outside the perimeter, and others underestimate which regulated activities they carry on. A written legal opinion sets out which of your activities, if any, are regulated, which helps you scope an AR appointment or an application properly. How written opinions work. If you already know you are inside the perimeter, see your options.