Obtaining an authorisation to offer financial services can be an expensive and lengthy process. That is why many firms turn to the appointed representatives (AR) regime, which enables an established firm, known as a principal firm, to take regulatory responsibility for a smaller firm, known as an AR. It allows the AR to carry out activities for which the principal has a regulatory authorisation and is used in a diverse range of financial services markets. The most common use of the regime is in retail lending, followed by general insurance and protection insurance (such as life and critical illness insurance).
This regime has been a longstanding feature of the UK financial services sector. It was introduced in 1986 and today there are about 40,000 ARs. The Financial Conduct Authority (FCA) and the Treasury are, however, increasingly concerned about certain features of the AR regime.
Call for evidence
In December 2021, the FCA published a consultation paper and the Treasury published a call for evidence. Both papers outline several alleged deficiencies of the AR regime and include proposals for reform on which stakeholders are invited to give their views. More specifically, both the FCA and the Treasury are concerned that principal firms are not dedicating sufficient resources and expertise to supervising ARs. This can lead to direct consumer harm, say the FCA and the Treasury, with consumers being offered products that are not in their best interests.
Following on from this, a number of policy proposals are being considered. Most importantly, the Treasury is considering whether some regulated activities should be removed from the AR regime altogether, which means that AR firms currently carrying out those activities would need to obtain authorisation from the FCA and would come under its direct supervision. The FCA, in turn, considers that additional reporting and supervision obligations may need to be imposed on principals, who would for instance be required to explain why they have appointed an AR, describe their non-regulated activity and annually check the details of their ARs in their reporting to the FCA.
Regulatory hosting, which is a specific way in which the AR regime can be implemented, has drawn particular criticism from both the Treasury and the FCA and will likely face reforms. Regulatory hosting involves a principal firm which does not carry out any regulated activity itself, but just holds an authorisation and in a way licenses it to ARs. If the principal starts to regard ARs as its ‘clients’ there is a potential for conflicts of interest. The Treasury and the FCA are indeed concerned that regulatory hosting firms do not dedicate sufficient resources and expertise to supervise their 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.’
Change on the agenda
Ultimately, the extent to which the Treasury and the FCA will choose to change the current system is uncertain. Each recognises the benefits of the AR system and acknowledges that banning the use of ARs altogether would have a negative impact on economic growth and competition.
However, it is clear that change is on the agenda and the FCA are seeking to ensure principals monitor, oversee and manage their ARs more effectively and consumers are also able to access better quality information on principals and ARs. These changes will bring a huge shift for the sector, and it is imperative for all stakeholders to engage with the Treasury and FCA on these mooted reforms by responding to the consultation and call for evidence.
The FCA’s consultation paper can be found here and the Treasury’s call for evidence here. Stakeholders have until 3 March 2022 to respond. DRD is on hand to help you prepare a response and arrange open-minded discussions with regulators and political decision-makers.