As part of our approach to improving the AR regime, we have been considering the use of the regulatory hosting business model.
What is a regulatory host?
This business model typically differs from a ‘network’ as the regulatory host firm’s ARs are generally independent, unconnected businesses, sometimes operating in different markets. These ARs may not have any relationship with the principal in terms of selling its products or services.
Regulatory host firms may oversee a wide variety of AR business models. In the more traditional AR network model, the ARs and principal typically share a common commercial objective and operate in a particular sector.
Harm arising from regulatory hosts
We have identified issues and potential harm arising from regulatory hosts. Our work has identified that most issues arising from regulatory hosting arrangements are due to the principal applying too little resources to overseeing ARs, lack of skills and experience in the different markets in which the ARs operate and lack of appropriate systems and controls in place to enable principals to effectively oversee their ARs.
Where principals are more reliant on income from their ARs to sustain their business model, this could also create a conflict of interest where a principal may be less able or willing to effectively oversee its ARs or take swift action to address harm when needed.
Our analysis of FCA and Ombudsman complaints shows that regulatory hosts have, on average, more complaints against them compared to other principals.
Regulatory hosts also create, on average, more FCA supervisory cases than other principals, and these cases are on average more severe. As a result, the time and effort we spend on regulating regulatory hosts is disproportionate to their size and level of activity.
Our Approach
On 3 August 2022, we published new rules[1] which set out changes to the AR regime. Firstly, we have clarified and strengthened the responsibilities and expectations of principals. Secondly, principal firms will need to provide more information regularly on new and existing ARs.
We will be taking an assertive approach to ensuring the regulatory hosting model is fit for purpose and principals comply with our rules which may include information requests and visits to firms.
Our rules now include a definition of regulatory hosting, and we will require principals to notify us if they provide these services. This will ensure that we are aware of all firms that use this business model given our increased focus on it and the potential risks to consumers that it presents.
We have refused an application to become a Regulatory Host. You can see more of the reasons behind that decision here[2].
The firm could not demonstrate that it had the skills, experience or the staff to oversee ARs. It was unable to describe a viable or sustainable business model. The firm was also unable to explain how its ARs would assess that products or services were appropriate for consumers, or to demonstrate that it would have direct responsibility for the conduct and compliance of its ARs.
If you wish to offer Regulatory Hosting Services, it is vital you are able to show your ability to be compliant with our new rules.
What you need to do if you are a principal firm
- Familiarise yourself with the new regulatory host definition.
- Review Chapter 4 of our policy statement[2] which refers to the harms that are associated with this model and take steps to ensure you will be able to meet the FCA standards.
If you are a principal firm and want to start operating as a regulatory host you need to tell us in advance.
You must notify us at least 60 calendar days before starting to provide regulatory hosting services. You can do this via Connect[2] using a SUP15 notification.
You also need to notify us of a proposed AR appointment at least 30 calendar days before the appointment takes effect. We summarise all our new requirements here[3].
Consumer Duty
You should also consider the Consumer Duty rules[4] and guidance during your review, which will take effect on 31 July 2023, ensuring your ARs’ products and services will act to deliver good consumer outcomes.
