Authorised firms will need permission from the Financial Conduct Authority (FCA) to begin using appointed representatives (ARs), as part of a Treasury overhaul of the sector published today.
Protection under the Financial Ombudsman Service (FOS) will also be extended for consumers where an AR engaged in a regulated activity which the principal had not accepted responsibility for.
However, Treasury rejected calls from MPs and Peers to cut the ‘confusing’ regime entirely and confirmed it will continue, saying it played an important part in the supply of financial services and provided substantial benefits to consumers and businesses.
There will be “targeted and proportionate reforms to shore up confidence” in ARs so businesses and consumers can benefit from the regime into the future, Treasury added.
Principal permission
The most significant change in a bid to prevent misconduct will be the so-called principal permission, requiring authorised firms wishing to use ARs to first obtain permission from the FCA.
“This will enable the FCA to ensure authorised firms have appropriate expertise and resource to effectively oversee their ARs and ensure they act responsibly,” Treasury said.
Existing principal firms will not need to apply for the new permission and the government is already working with the FCA to design the measure and develop a proportionate implementation.
It intends to embed the principal permission in the new firm authorisation process so there will not be a separate application process for new firms to follow while the FCA will be able to limit, vary or revoke a permission to act as principal if necessary.
Respondents to the Treasury call for evidence gave “broad support” to this approach to address the problem of the poor standard of principal oversight in some cases.
Some respondents, while expressing support, cautioned against implementing it in ways which would increase the regulatory burdens with a complicated and slow permissions process that could undermine the benefits of the AR regime.
FOS protection
The second change will expand consumer protection under the FOS to include all AR regulated activities.
Currently consumers who suffered a loss where an AR engaged in a regulated activity for which the principal had not accepted responsibility often have no recourse to the FOS.
Instead, consumers will be able to take a complaint to the FOS if they are unable to resolve a dispute involving an AR where the authorised firm is not responsible for the issue in dispute.
Although it is a relatively small percentage of FOS cases, Treasury said it saw this as an important gap in regulatory coverage to close.
“The government intends to use a targeted extension of the FOS compulsory jurisdiction to ensure that all consumers of regulated financial services, whether dealing with an authorised firm or an AR, have access to the FOS on a consistent basis,” Treasury said.
Where the FOS decides that a principal firm is responsible for misconduct involving an AR, the FOS will continue to direct any redress measures to the principal firm.
But in cases where the FOS decides a principal firm cannot be held responsible for its AR’s actions, the FOS will be able to directly investigate the AR itself.
If the FOS upholds a complaint against an AR, the FOS will be able to direct any redress measures to the AR itself.
Treasury continued: “It is important to emphasise that this extension of the FOS’s jurisdiction will only apply in circumstances where a principal firm is not held responsible by the FOS for the actions of its AR.
“The proposed reform will not in any way diminish the high level of responsibility and oversight that principal firms are required to provide for their ARs.
“That responsibility includes the principal taking all reasonable steps to ensure that the AR is only carrying on regulated activities to which the principal has agreed, in accordance with FCA rules.”
The proposed limited extension of FOS jurisdiction to ARs will be designed and implemented to be consistent with the conclusions of the FOS review published by the FCA last month.
FCA focus
Since the regime began in 1986 the use of ARs has increased and spread across much of the financial services sector with around 34,000 ARs operating under around 2,400 authorised firms.
In recent years the FCA has made the AR regime a key focus for its regulatory activities and in September the regulator revealed action it had taken in its latest financial year had resulted in principals terminating relationships with 300 introducer ARs and 350 full ARs.
HM Treasury has been investigating the AR sector for several years, with the Conservative government issuing a call for evidence in December 2021 on the overall scope, benefits and risks associated with the current regulatory approach for ARs.
