The FCA is considering possible legislative changes to the appointed representatives (AR) regime to ensure that principals and their ARs have appropriate oversight and control of their activities, are financially stable and deliver fair outcomes for consumers when selling financial products or giving advice.
The FCA announced as a priority in its 2021/22 Business Plan the tightening of its supervision and supervisory expectations of ARs and their principal firms to reduce the risk that ARs usage weakens conduct standards.
How the AR regime works
The AR regime allows unregulated firms to carry on specific regulated activities under the supervision of an FCA-authorised firm, who acts as principal and who must take responsibility for their ARs' conduct. The principal is, therefore, responsible for ensuring the ARs' compliance with FCA rules and is accountable for any breaches. Principal firms must notify the FCA of their appointments of ARs; FCA approval of the appointment is not required.
Problems with the AR regime
Three key problems are:
Reviews of the AR regime have exposed shortcomings and weaknesses in the due diligence, control and oversight by principals of their ARs: the FCA has had concerns about the effectiveness of the principal model since its reviews into the use of the AR regime in certain sectors (general insurance in 2016 and investment management in 2019).
Principal firms with ARs generate more complaints indicating a possible higher risk of consumer harm: the FCA's recent Strategy and Feedback Statementon consumer investment revealed that "Principal firms who use ARs are, as a whole, responsible for more complaints and redress (weighted by activity) than non-principals", with data showing FSCS claims for principal firms and their ARs sitting at £641.0m compared to £392.6m for non-principal firms. In order to mitigate ARs-posed risks the FCA is increasing its supervision activity, both by focusing on high-risk principals and by increasing scrutiny of firms when they appoint ARs.
Staff performing similar roles in the principal firm and its AR are subject to different FCA rules: individuals with ARs are not subject to the Senior Managers and Certification Regime, which applies to most authorised firms and is aimed at making individuals more personally accountable for their conduct and competence; instead they are generally subject to the Approved Persons regime, which requires FCA approval for certain controlled functions and governing functions.
In the coming weeks and months, as well as more targeted FCA supervision to reduce the most significant risks from ARs usage, firms can expect a cross-sector review of the AR regime, including the following key elements:
FCA consultation: we are expecting a consultation imminently on changes to FCA rules around the AR regime to improve and strengthen it, including changes to require more timely information on principals and their ARs and to improve principals’ ongoing oversight and due diligence of current and prospective ARs.
FCA data requests: as part of the FCA's increased supervision activity to reduce risks presented by ARs, principal firms can expect data requests seeking additional information on their ARs.
Treasury call for evidence: significant changes to the AR regime require Treasury involvement as the regime is governed by the Financial Services and Markets Act 2000. The Treasury intends to issue a call for evidence to gather views from stakeholders on the overall aim, scope, benefits and risks of the current AR regime.
Possible legislative change: the Treasury has already started work to review the AR regime but any proposed legislative changes will follow after discussions with the FCA and consideration of the data received via the FCA data requests and the feedback on the FCA consultation.