The FSA's rules will require firms to make detailed preparations in forming AR agreements, says Alan Hughes

The rules on appointed representative (AR) agreements are complex. They are set out in th …

The FSA's rules will require firms to make detailed preparations in forming AR agreements, says Alan HughesThe rules on appointed representative (AR) agreements are complex. They are set out in the FSA's Supervision Manual, chapter 12. Before a principal (the broker) can appoint an AR it must satisfy itself that the AR is suitable to deal with clients in its name. To this end, the principal must:

  • Assess the financial position of the proposed AR by reviewing its accounts; performing credit checks (on the AR and its directors or partners) and obtaining financial forecasts from the AR
  • Assess the fitness and propriety of the AR (by checking its professional reputation) and its directors or partners (including their financial standing)
  • Check that the AR has no close links with other persons that will prevent effective supervision of the AR by the principal
  • Check whether the AR has any other existing principals.
  • ARs should not therefore be surprised when a potential principal asks them for information to satisfy the above. The principal has a duty to do this and will be in breach of FSA rules if he fails to do so. The principal also has a duty to ensure that an AR and its directors or partners continue to be suitable on an ongoing basis. AR agreements are therefore likely to contain terms requiring ARs to co-operate with any checks performed by the principal at any time while the agreement is in force.Under FSA rules there are a number of terms that must appear in any AR agreement. These are:
  • A requirement that the AR notifies the principal if it is appointed as an AR by another principal (unless the contract prohibits this)
  • A prohibition on the AR representing other principals or a provision allowing the principal to impose such a prohibition or restrictions on the other principals that the AR may represent and the types of business that may be conducted for them
  • A term requiring the AR to cooperate with the FSA and give access to its premises
  • A term requiring the AR to cooperate with the principal's auditors and give access to its books.
  • Maintaining controlThe required contract terms are designed to give principals sufficient control over the activities of their ARs. This is to ensure that the ARs comply with FSA rules and do not present a threat to the FSA's statutory objectives. Principals are also required to have sufficient terms in their contracts with ARs to allow supervision of them. The terms are largely compulsory. If an AR is not prepared to agree to such terms, it should consider whether an AR arrangement is appropriate for its business.In addition to the required contract terms, the remainder of the AR agreement will be made up of "commercial terms", which are "agreed" between the principal and an AR, although in reality many principals will have a standard AR agreement that will be offered to potential ARs on a "take it or leave it" basis. Some of the usual terms are:

  • Personal indemnities from the directors of a limited company AR to the principal, in respect of any loss caused to the principal by the activities of the AR. These usually survive termination and consequently can eliminate much of the benefit of limited liability for the directors of limited company ARs
  • Termination - how easy is it for the AR to terminate the AR agreement and what are the consequences of termination
  • Contact with clients - client ownership should remain with the AR and the principal should only be permitted to contact clients direct in very limited circumstances. The principal should however insist on ownership of client files relating to business conducted while the AR agreement is in force, as the principal is liable for that business. ARs should ensure that they will be entitled to a copy of all such files and terminations
  • Other principals - as multiple principal agreements are now compulsory, the agreement should contain terms relating to the exchange of informatiom between principals.
  • Alan Hughes is a solicitor in the financial regulation team of Bond Pearce