In August 2022, the FCA released a policy statement introducing improvements to the appointed representative (“AR“) regime. In its policy statement, the FCA provides feedback on its earlier consultation, and sets out new rules to make authorised financial firms more responsible for their ARs.
In its press release, the FCA says that whilst some principal firms do effectively ensure their ARs comply with rules, “many do not adequately oversee the activities of their ARs“. It says its new rules will “prevent consumers being mis-sold or mis-led by ARs and will prevent misconduct by ARs undermining markets operating fairly and safely“.
An AR is a firm or person that carries on a regulated activity on behalf, and under the responsibility of, a firm authorised by the FCA (the “principal“). In appointing ARs, the principal (typically for a fee or in connection with other services) assumes responsibility for the regulated activities carried on by the ARs – which, by themselves, are not directly authorised by the FCA.
The AR regime was originally introduced in the 1980s, primarily to allow self-employed people and small businesses to engage in regulated activities without having to be authorised. The model was popular in industries such as insurance broking. However, as the UK financial services market has evolved, the regime has been used to enable a wider range of business models such as regulatory hosting (i.e. where the principal does not carry on any substantive regulated activities itself but solely oversees the use of its permissions by its ARs). This has prompted debate about the proper ambit of the AR regime.
The AR regime can have many benefits, such as lowering some of the barriers to entry to the market for innovative and/or disruptive financial services businesses, and so stimulating competition and market access. On the flip side, the FCA has identified a range of risks of harm across the sectors where firms operate with an AR model. This harm is not necessarily inherent to the AR model, but often occurs where a principal fails to perform sufficient due diligence before agreeing to host an AR; or fails to oversee and control its ARs’ activities adequately in line with its regulatory obligations.
There have been several high profile examples of the risks and challenges with the AR regime in recent years. Most notably, these were highlighted in the collapse of supply chain finance firm, Greensill Capital in 2021. Greensill Capital was not directly regulated by the FCA, but made use of the AR regime when it needed to undertake regulated activities.
A report from the Treasury Committee, published in July 2021, said about the Greensill collapse (paragraphs 50 – 51):
“It appears that the appointed representatives regime may be being used for purposes which are well beyond those for which it was originally designed… The FCA and Treasury should consider reforms to the appointed representative regime, with a view to limiting its scope and reducing opportunities for abuse…“
The FCA’s changes to the AR regime set the ambitious aim to address the risks of harm arising in the market whilst retaining the cost, competition and innovation benefits the AR model can provide. Under the new rules – which come into force on 8 December 2022 – principal firms are required to:
- Apply enhanced oversight of their ARs, including ensuring they have adequate systems, controls and resources.
- Assess and monitor the risk that their ARs pose to consumers and markets, providing similar oversight as they would to their own business.
- Annually review information on their ARs’ activities, business and senior management, and be clear on the circumstances when they should terminate an AR relationship.
- Notify the FCA of future AR appointments 30 calendar days before they take effect.
- Provide complaints and revenue information for each AR to the FCA on an annual basis.
The FCA says its new rules do not change the fact that principals are responsible for the activities of their ARs. Indeed, much of the above may appear to principal firms to represent only modest incremental change to best practice under the previous regime. The FCA says that it is working with HM Treasury to explore if further changes are required to the AR regime, which could lead to future legislative change.
The FCA’s Executive Director for Consumers and Competition, Sheldon Mills, is quoted as saying that:
“While appointed representatives can bring innovation and choice, principals and ARs account for more than 60% of the total value of recent claims to the Financial Services Compensation Scheme. They also generate up to 400% more supervisory cases and complaints than other directly authorised firms.
The changes we’re making will help ensure that principals manage their ARs better – ensuring that they provide the oversight needed to avoid consumers being mis-sold or mis-led and to make sure markets can operate safely and fairly. They will also need to provide us better data and information to support our own work.“
Whether these statistics are due to fundamental weaknesses in the AR model itself, or rather reflect the higher risk profile of the type of “innovative” entrants to the financial services market that have made use of the AR regime in recent years (and if so whether that is desirable) is hard to assess. In the meantime host firms will need to revisit their existing arrangements for oversight of their ARs, as this is sure to remain an area of FCA focus over the next 12 months.
Please do not hesitate to contact our team if you need any guidance on the changes to the AR regime.