Appointed Representatives (ARs) are entities or individuals who are not themselves authorised under the Financial Services and Markets Act (FSMA), but who carry on regulated activities on behalf, and under the responsibility of, their FSMA-authorised "principal". There are currently around 40,000 ARs operating under approximately 3,600 principals across a range of financial services markets.
Since the regime's introduction, a range of models have developed, many of which the regime was not designed to accommodate. The regime has grown from a mechanism for salespersons to distribute investment products on behalf of their principal to one that can provide an ability to operate without direct authorisation but with relative independence (albeit still under the supervision of an authorised person). Three quarters of ARs are within the retail lending and general insurance and protection markets, and only around half of principals have just one AR, with some having hundreds or even thousands.
According to the FCA, on average principals generate between 50% and 400% more complaints and supervisory cases than directly authorised firms. The FCA wants to combat the harm it is currently seeing across all sectors where firms have ARs. In light of this, it has published a consultation paper on improving the AR regime which it encourages ARs and all firms who use, or may in the future use, ARs, to read and consider.
Why the need for review?
The FCA believes that the harm it is currently seeing across all sectors where firms have ARs results from principals failing to perform sufficient due diligence and conduct adequate oversight of their ARs. The proposed policy changes aim to reduce the potential harm to both consumers and markets. Previous thematic reviews displayed issues with the regime in sectors such as insurance and investment management, such that the FCA considers the harm to be cross-sectoral.
It is important to identify at the outset that, whilst the FCA is critical of the AR regime, hence the need for a consultation, it also acknowledges the benefits the model provides. According to the FCA, these benefits include that the AR regime:
- Is a cost-effective way to comply with regulation
- Supports the FCA's engagement with firms, enabling amplification of its messages
- Allows more participants in the financial market which can support effective competition
- Provides a platform to trial new services
- Ensures good outcomes for consumers and markets where principals exercise high-quality oversight and monitoring of their ARs.
The FCA notes how the AR regime has developed significantly in terms of the scope of products and services it covers in comparison to its initial formulation and that, although the above advantages of the structure persist, the model generates significantly more issues and complaints than directly authorised firms do. One example of how the model has evolved is the use of introducer appointed representatives (IARs). These have become so prevalent that the FCA, in its consultation, identifies certain proposals that specifically would (or would not as the case may be) apply to IARs – as the current rules also in some places distinguish between IARs and "full" ARs.
On the other end of the scale is the recent evolution of the "hosting" model, whereby an authorised business is set up specifically for the purpose of allowing ARs to make use of the principal's regulatory permissions. This creates cost-effective market entry for ARs, and is particularly useful for businesses that want to establish whether they are likely to be sufficiently successful to merit the cost of an application for direct authorisation and ongoing compliance costs before taking the plunge.
The Treasury Select Committee report on Greensill Capital published earlier this year also noted how the regime is being used beyond its original purpose, and recommended that the FCA and Treasury consider reforming the regime; an endorsement which the FCA welcomes. Not least, as the model has evolved, it is naturally more difficult for principals properly to oversee the operations of their ARs when the ARs' work is not directly linked to that of the principal.
Objectives of the review
The FCA's aim is to address the harm in the market while retaining the cost, competition and innovation benefits that the AR model is capable of providing. Key harms identified in the consultation paper, which the FCA is keen to tackle, include:
- Consumers being offered products and services that are not fit for purpose or their individual needs, or which do not represent fair value
- Consumers receiving sub-standard treatment and/or poor service
- Consumers being unable to access appropriate redress where ARs act outside the scope of their appointment.
The FCA is also aware of the need to advance its overarching objectives. It considers that the policy changes will progress these objectives in the following ways:
- Consumer protection: increased clarity on principals' responsibilities and the FCA's expectations of them will reduce the risk of ARs mis-selling products which do not meet consumers' needs, and the improved data collection will enable the FCA to quickly and effectively address identified issues
- Market integrity: the proposals preserve the AR model and hence will maintain the options available to customers as well as reducing the levels of misconduct and complaints in the market
- Competition: ensuring that standards are upheld across firms will raise the quality of competition across markets.
What does the consultation propose?
The FCA's proposals relate to two overarching objectives, identified and explained below.
Firstly, the FCA wants to clarify and strengthen principals' responsibilities and the FCA's expectations of them in relation to their monitoring, management and oversight of ARs. This includes providing principals with more detailed guidance on the circumstances where it may be necessary to terminate an AR relationship, as well as how in practice they should go about winding it down. New requirements of principals would include requiring them to annually review senior management within ARs and complete an annual self-assessment in relation to their compliance with applicable rules and guidance relevant to ARs.
Secondly, the FCA is aiming, through its policy proposals, to improve the quality of available information relating to principals and ARs. The key method it proposes by which to achieve this is to require principals to provide more information to the FCA, including:
- Providing the FCA with information on why the principal wishes to appoint the AR, the business their ARs conduct and will conduct under the AR arrangement, the financial arrangements with the AR and, on an ongoing basis, information on significant changes. The FCA proposes that it should be notified of a proposal to appoint an AR at least 60 calendar days in advance of the appointment taking effect
- Verifying AR data annually, in the same way that firms must verify their own data
- Providing complaints data relating to their ARs, and revenue details for their ARs
- Notifying the FCA of the specific activities ARs are allowed to undertake so this can be shown on the Financial Services Register
- Informing the FCA of any intention to begin providing regulatory hosting services.
In relation to Handbook changes, the vast majority of the amendments proposed within the consultation paper relate to SUP 12 and effectively reiterate and build on expectations the FCA already places on principals, but which it feels are not being properly observed. The FCA notes that its proposed simplification of the structure of SUP 12 does not change the content of the requirements. In addition to the specific changes to SUP 12 that the FCA is consulting on, it is also asking for views on the risks arising from regulatory hosting arrangements and business models where ARs are large in size relative to the principal. It sees significant risks of consumer harm in the model, yet wants to find an appropriate and proportionate approach to address it. A discussion chapter of the consultation seeks views on whether the wider risks imposed by such models could be reduced by setting limits on the arrangements.
With regards to application of the proposed policy updates, the FCA is not currently recommending that the changes apply to firms in the Temporary Permissions Regime (TPR) or Financial Services Contracts Regime (FSCR). The FCA takes this view on the basis firms operating under the TPR are likely to be directly authorised (or otherwise subject to regulation) by the time any new rules would take effect, but it will continue to monitor this.
In addition to the consultation, the FCA has also published a call for evidence in collaboration with HM Treasury to gather information on how market participants use the AR regime, and their views on its effectiveness, to assess whether legislative change is needed.
The call for evidence particularly seeks views on:
- The overall scope of the regime, and the activities that ARs are permitted to carry on – in particular, should any activities be removed from scope (particularly those in the wholesale markets)
- Whether the FCA has enough in its regulatory toolkit properly to prevent abuse of the regime – for example, should there be a "principal permission" gateway such that firms could not appoint ARs without the FCA having assessed their fitness to act as principal
- Whether more direct regulatory requirements should be placed on ARs – such as extending the SMCR in some form
- The role of the Financial Ombudsman Service – for example, should a principal be responsible for all of an AR's regulated activities, even if these fall outside the scope of the AR agreement, thereby allowing the FOS to determine all complaints against ARs.
The FCA will consider feedback to this call for evidence when developing its final rules.
The deadline to respond to both the consultation and the call for evidence is 3 March 2022.