The Financial Conduct Authority (FCA) has revealed it is working with HM Treasury on potential legislative changes to “strengthen the regime” around principal and appointed representative (AR) firms.
The regulator said it wants to “raise the quality of financial advice” and “address misuse of the appointed representative regime” and will be publishing a consultation later this year.
It also added that it will be working with the industry “to create the conditions for firms to demonstrate good advice to reduce professional indemnity insurance (PII) premiums”.
While the latest update came in its Consumer Investments: Strategy and Feedback Statement, the FCA has previously highlighted concerns about the relationship between principal and AR firms across the industry and repeated this latest step was part of its wider work.
It highlighted that principal firms who use ARs were responsible for more complaints and redress when weighted by activity than non-principals.
This, the regulator said, had the potential to translate into significant redress liabilities over time.
The FCA noted: “As we make changes, we aim to see the burden of compensation costs falling in the years ahead.”
It continued: “We propose to consult on changes to our rules, to clarify our expectations of principals and thereby ensure that we can more effectively challenge principals about their ability to oversee the activities of ARs, before harm occurs.
“We are also engaging with the Treasury about the potential for legislative change to strengthen the regime for principals and ARs.”
Stricter monitoring of ARs
However, the FCA acknowledged these changes could take time to implement and it does not expect compensation costs to begin falling until 2025.
As a result, the regulator said it would be taking other steps in the meantime and tightening supervision.
“As part of our wider appointed representatives work, which we announced in our recent business plan, we are increasing our supervision activity to reduce the risk posed by ARs,” it said.
“As well as activity focused on high-risk principals we will be increasing our scrutiny of firms when they appoint ARs.”
