The Financial Conduct Authority (FCA) has confirmed new rules to make authorised financial firms more responsible for their appointed representatives (ARs).
ARs can offer certain financial services or products under the responsibility of authorised firms (known as principals) but are not authorised by the FCA.
Principal firms are responsible for ensuring their ARs comply with the FCA’s rules. While the FCA acknowledges that some principals do this effectively, it believes many do not adequately oversee the activities of their ARs.
In April the watchdog set up a new division to better supervise ARs and published its three-year strategy, which set out plans to “intensify” its supervision of principals and cut down “the most significant risks” of ARs. It went on to propose tougher oversight of ARs.
The regulator has expressed concern over the AR/principal structure for peer-to-peer lending platforms, preventing Rebuildingsociety’s ARs from doing any new lending since 26 February 2021.
Under the new rules, principal firms will need to apply enhanced oversight of their ARs, including ensuring they have adequate systems, controls and resources.
They will need to assess and monitor the risk that their ARs pose to consumers and markets, providing similar oversight as they would to their own business.
The FCA expects principals to review information on their ARs’ activities, business and senior management annually, and be clear on the circumstances when they should terminate an AR relationship.
The must also notify the FCA of future AR appointments 30 calendar days before it takes effect and provide complaints and revenue information for each AR on an annual basis.
“The appointed representative regime is an anomaly,” said Simon Morris, a financial services partner with law firm CMS. “Created nearly 40-years ago, it enabled life insurance distributors to tie to an insurer to avoid direct regulation. Since then it has mushroomed, with ARs sometimes larger or more complex than their regulated principals, and generating disproportionate costs, claims and complaints.
“The FCA recognises that it is no longer fit for purpose and is taking first steps to tighten this regulatory lacuna. The new rules require firms to improve oversight of their ARs and provide the FCA with additional information – two elements so obvious that their absence highlights structural weakness in the present regime. If this doesn’t work, the FCA has raised two future possibilities – limiting the aggregate size of a firm’s ARs and imposing a tighter regime where a firm’s ARs carry on independent businesses separate from that of the firm.”
The FCA hopes the new rules will help prevent consumers being mis-sold or misled by ARs and will prevent misconduct by ARs undermining markets operating fairly and safely.
Under the new rules, it remains the case that principals are responsible for the activities of their ARs. However, FCA is working with the Treasury to explore if further changes are needed to the AR regime, which would require future legislative change.
“While appointed representatives can bring innovation and choice, principals and ARs account for more than 60 per cent of the total value of recent claims to the Financial Services Compensation Scheme. They also generate up to 400 per cent more supervisory cases and complaints than other directly authorised firms,” said FCA executive director for consumers and competition Sheldon Mills.
“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 misled 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.”