There have been calls for proposed changes to the Appointed Representatives Regime (“AR Regime”) to help mitigate any potential risks and harm that may be caused to consumers and markets. In December 2021, HM Treasury published its Call for Evidence in response to the ‘TSC Lessons from Greensill Capital Inquiry’, which calls for recommendations by the Treasury Select Committee on reforms to the AR Regime including legislative reforms, if necessary. Similarly, the Financial Conduct Authority (“FCA”) also launched its Consultation Paper CP 21/34 on improving the AR Regime following issues discovered from thematic reviews of the general insurance sector in 2016 and later, the investment management sector in 2019.
SUMMARY OF THE AR REGIME
An appointed representative (“AR”) is a firm or person who carries on regulated activity or activities under the responsibility of an authorised financial services firm, often referred to as the ‘principal’. The AR Regime affords to ARs the benefit of carrying out certain regulated activities without the need to get full authorisation from the FCA. However, HM Treasury and the FCA have expressed concerns over significant risks particularly in respect of the principals and acknowledgement of their regulatory responsibilities with appointing an AR and as such, have called for reforms to the AR Regime.
HM TREASURY CALL FOR EVIDENCE
The four key areas which the HM Treasury believe reform is required include:
- The overall scope of section 39 FSMA exemption: currently within the scope of the exemption, any authorised person is permitted to appoint a non-authorised person, to act as a representative in carrying on a wide range of regulated activities. HM Treasury is considering:
- amending the scope of the regulated activities which can be carried out by ARs, to include additional carve outs which would sit alongside current restrictions, most notably, ARs cannot carry out the activity of managing investments; and
- specifying new conditions for the exemption to apply to help improve market integrity. Such conditions could include, for example, setting a limit for the maximum size of an AR’s business before they are required to become authorised in their own right.
- Enhancing the role of the FCA: the introduction of a ‘permission gateway’, whereby authorised firms must gain further permission or approval needed from the FCA before appointing an AR. The aim of which, will allow the FCA to scrutinise a principal’s fitness to act as a principal.
- Placing more regulatory obligations on ARs: to allow ARs to better comply with their regulatory obligations for example through the Senior Managers and Certification Regime which could be extended to cover ARs and arguably would raise standards of fitness and propriety in AR firms, helping to reduce the risk of detriment to consumers. This would also set ARs in good stead for obligations they will likely need to comply with if they were to subsequently become authorised fully by the FCA.
- Extending the ability of the Financial Ombudsman Service (“FOS”) to investigate complaints involving the activity of ARs: there may be cases where an AR engages in activity which falls outside the remit of the AR Agreement with their principal and as a result, the performance of such activities may go undetected, resulting in a consumer having no redress against the principal firm for any errors made by an AR in those situations. As a result, the FOS is unable to consider any complaint in relation to that activity. To mitigate this risk, HM Treasury are proposing to extend the section 39 exemption so a principal is responsible for all of an AR’s regulated activity, irrespective of anything contrary set out in their contractual arrangements. This would enable the FOS to investigate complaints relating to all regulated activities undertaken by the AR and provide redress against the principal firm.
FCA
The two main areas that the FCA considers require change include:
- Additional information on ARs and notification requirements for principals: The FCA aims to create transparency and identify the risks associated with principals and ARs, particularly to better understand whether principals have the expertise, systems and controls in place to appropriately oversee an AR’s activities. This includes, amongst other things, requiring additional information and details on the AR’s business, AR’s revenue, and complaints against ARs, on an ongoing basis. The notification requirement includes principals notifying the FCA of an appointment of an AR at least 60 calendar days before an appointment takes effect. The aim of which, will allow principals to better identify issues which could lead to consumer harm more quickly and efficiently. Such proposals also extend to introducer ARs.
The FCA proposals also call for principals to report to the FCA any planned changes to the AR’s name or to the categories of regulated activities the principal allows the AR to undertake, at least 10 calendar days before the change takes effect.
- Clarifying and strengthening the responsibilities and expectations of principals: Currently SUP 12 of the FCA Handbook sets out guidance for principals on whether ARs meet the fit and proper test before and after they are appointed. The FCA is proposing to extend the current position to include an additional requirement on the principal to review whether senior management within the AR firm remain fit and proper to act in that capacity, on an annual basis. The FCA is also consulting on principals having effective safeguards in place where tasks are delegated to an AR or tied agent, to include requirements around having appropriate resources to monitor and enforce AR’s regulatory compliance, for example ensuring that the delegation does not represent a conflict of interest. The FCA also propose guidance on how and when to terminate or remediate issues with an AR relationship. This could include amongst other things, circumstances where an AR is found to have intentionally misled its customers in any way. For example, by including a misleading status disclosure on its website, other communications or financial promotion materials. The FCA also proposes that principals carry out self-assessments on ARs demonstrating compliance with the policy and methodologies used to complete self-assessments. This will help principals make an informed decision on how to deal with issues within an AR relationship to reduce consumer and market harm.
NEXT STEPS
Both the FCA and HM Treasury seek comments and views from stakeholders on both the Consultation Paper and Call for Evidence by 3 March 2022. Both the FCA and HM Treasury acknowledge the benefits of the AR Regime, however it is apparent that as the AR Regime has developed over time, the legislative reforms have remained the same. Calls for proposals are therefore needed to ensure that the objectives which the AR Regime sought to protect when established in 1986 are met, and reforms put in place to keep up with market developments.
For more information, and any guidance or advice on changes to the AR Regime, or your responsibilities as a principal firm or AR, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.
