MPs and peers are proposing that the appointed representative (AR) regime should either be banned entirely or networks should be made 100% responsible for their ARs.
They suggest the Financial Conduct Authority (FCA) could replace the regime for ARs with an arrangement where ARs would need to become directly regulated through the FCA and have advice networks employ ARs directly, rather than have them run their own firms.
The report from the MPs in the All-Party Parliamentary Group for Investment Fraud and Fairer Financial Services also accused the regulator of being “incompetent” and failing to perform its functions and called for it to be overhauled.
Focus on ARs
In recent years the FCA has made the AR regime a key focus for its regulatory activities as it has published evidence showing that authorised firms’ oversight of ARs was not always effective.
And in September the FCA revealed action it had taken in its latest financial year had resulted in principals terminating relationships with 300 introducer ARs and 350 full ARs.
However, the report found that appointed representative status is “confusing and problematic” and brings regulatory “ambiguity that can be gamed by the unscrupulous and the criminal.”
It accuses the FCA of continuing to regulate this area “poorly”, adding that investors dealing through ARs are often not fully protected by the regulatory status of the principal of the appointed representative.
According to the report, issues with AR status has been a “big problem” for years as investors lose money when things go wrong and find it more difficult to get redress than might otherwise have been the case.
Consequently, the report as AR status is a “highly problematic” area, there is a case for the AR regime to be scrapped and for government to legislate to ban this regime.
The report adds: “The AR regime is rife with scams and this creates huge confusion among the public.
“The FCA could replace this and say if you want to become regulated, you will have to become directly regulated through us.
“This would create a big issue for the advice networks, and organisations such as St James’s Place, but they could change their model so all the advisers would become employees of their business rather than having the status of running their own AR firms.
“Banning the AR regime would make financial services simpler for consumers to understand and this would stop bad actors from using AR principals that do not carry out sufficient checks on.
“One issue with this proposal would be it would create a large amount of extra cost for the FCA but this could be in part covered by an increase in fees from more firms becoming authorised with the FCA.
“Alternatively, a significant improvement would be to make the principal firm 100% responsible for the activities of its AR(s),” the report added.
Principal findings
Among the report’s principal findings, the report found that the FCA is widely seen as “incompetent” and a significant number of respondents believe the FCA sometimes acts in bad faith.
It also describes the FCA’s treatment of whistleblowers and their evidence as “alarming”.
Current and former employees depicted the FCA as having a “defective” culture, one that has got worse rather than better in recent years, in which errors and inaction are “too common”.
They noted there was “little accountability”, and those who challenged a top-down ‘official line’ on any given issue are “bullied and discriminated against”, or even managed out.
The report found there was plenty of testimony from people who have tried to hold the FCA to account in one way or another; almost without exception, their efforts have been thwarted.
It is clear that any journey toward rebuilding confidence must be anchored in measures to lift the current cloak of opacity and lack of consequences for failure, the MPs argued.
And across all stakeholder groups there was near unanimity that the FCA’s claimed transformation has been ineffective, with cynicism from many respondents about whether it was ever intended to achieve genuine change.
Government action
The report recommends that government can help the FCA perform more effectively through legislative changes, including measures to:
- Establish a Financial Regulators’ Supervisory Council, which would conduct periodic reviews of the operational effectiveness of the FCA
- Remove the FCA’s immunity from civil liability to consumers
- Put in place restrictions on whether/when regulators join regulated firms, and vice versa
- Strip out the fundamental conflicts of interest within the FCA’s objectives
- Introduce a statutory, civilly actionable Duty of Care
- Give the Financial Services Consumer Panel a statutory remit, introduce Parliamentary
oversight of the appointment of its chairman - Change the way the FCA is funded
- Overhaul the way the FCA’s senior leadership team is appointed
- Establish a new NGO to act as a counterweight to industry lobbying
- Replace the FCA’s leadership team if it proves necessary
- Carry out a Royal Commission for radical architectural reform, if all else has failed