The Financial Conduct Authority (FCA) is proposing tighter controls and greater data sharing on appointed representative (AR) firms to cut complaints and consumer harm.
The regulator revealed complaint levels against ARs were 50% to 400% higher than directly authorised (DA) businesses and is putting the onus on principal firms to address this through the new rules.
In all there are around 40,000 ARs operating in the financial services sector, with the highest numbers in the retail lending (around 16,200) and general insurance and protection (around 13,500) sectors.
The FCA is focusing on two key areas – additional information on ARs and notification requirements for principals, and clarifying and strengthening the responsibilities and expectations of principals.
The plans will require a far deeper and more detailed range of information to be shared by principal firms on their ARs including complaints data, revenue, non-regulated activities and financial arrangements between principals and ARs.
“This will allow us to more easily identify potential risks within principals and ARs,” the FCA said.
“It will also help us better assess whether the principal has the expertise, systems and controls to effectively oversee its ARs and to target our supervisory interventions more effectively.”
FCA register
Information about the nature of the regulated activities the AR carries out which the principal takes responsibility for will also be included in the FCA’s register.
The register currently does not state which regulated activities an AR is permitted to undertake but links to the principal’s entry.
However, the FCA noted that as the principal may have several permissions, not all of which have been permitted for the AR to use, this was potentially misleading for consumers.
“Including this information on the register would allow consumers to easily and quickly check the types of regulated activities which ARs are and are not permitted to undertake,” it said.
“This will also help consumers avoid instances in which an AR operates outside of its agreement with the principal. It would also help minimise confusion where an AR is acting on behalf of more than one principal.
“This would also provide consumers with greater clarity as to whether they might have recourse to the Ombudsman if things go wrong.”
Wide range of harms
The FCA is working with HM Treasury on the changes as the AR model is established by legislation and as a result, Treasury has published a call for evidence about the AR regime.
The regulator acknowledged the AR regime has benefits but said it had “seen a wide range of harm across all of the sectors where firms have ARs.”
“Where harm occurs, it is often because principals do not undertake adequate due diligence before appointing an AR, and from poor ongoing control and oversight.
“We consider there is now significant evidence of harm requiring regulatory intervention,” it added.
Strict timelines will also be implemented to ensure data is updated promptly and regularly to ensure accuracy.
For example, the FCA is proposing that a principal firm notifies the FCA of a proposed AR appointment at least 60 calendar days before the appointment takes effect.
And annual reporting, such as revenue or complaints data, must be completed within 30 business days of the firm’s accounting reference date.
FCA executive director for consumers and competition Sheldon Mills (pictured) said: “The appointed representative model helps bring choices to consumers, but the level of harm we are currently seeing is too high.
“There are real risks of consumers being misled and mis-sold with little scope for recourse. We have already started work looking at high risk ARs and these proposals build on that work.
“We want to ensure that principals are properly overseeing their appointed representatives, ensuring they are competent, financially stable and delivering fair outcomes for consumers.”
List of details
The FCA’s proposed full list of new information being requested for each AR is:
- The primary reason for the principal’s intention to appoint the AR.
- The nature of the regulated activities the principal will permit the AR to undertake.
- Non-regulated business of the AR. This includes:
- The nature of the non-regulated business;
- The proportion of the non-regulated activities compared to the regulated activities in the first year following the appointment.
- Whether the AR will provide services to retail clients.
- Whether the AR was previously an AR of a different principal, and if so, why the AR is now intending to operate under a new principal.
- Whether the AR is part of a group. If so, provide the name of the parent undertaking. Activities of a wider group the AR is part of can affect the activities of the AR and the potential risk from it. Requiring firms to provide this information will allow the FCA to monitor this more effectively.
- Whether any individuals from the AR will be seconded or contracted to the principal firm to carry on portfolio management and/or dealing activities, and if so explain the rationale for entering into such an arrangement.
- Information about the nature of the financial arrangements between the principal and the AR. For example, whether the AR pays or will pay the principal commission, any flat fees, or any additional payments. This would give a better understanding of the financial relationship between the AR and the principal.
- Anticipated revenue from regulated and non-regulated activity during the first year of appointment.