Appointed representatives regime to undergo significant reform

Briefing

On 3 December 2021, HMT published a call for evidence regarding the appointed representatives regime and the FCA published a consultation paper proposing policies to alter the requirements for principals.

Following the failure of the prominent appointed representative firm, Greensill Capital, the Treasury Select Committee published a report in July 2021 which found that the appointed representatives regime was being used for purposes beyond those for which it was originally designed. To prevent firms abusing the regime, the report recommended the FCA and HMT consider reforms to the regime with the aim of limiting its scope.

Currently, a principal firm that is authorised by the FCA to conduct regulated activities may appoint an unauthorised firm to carry on those regulated activities on its behalf as an appointed representative (AR). While there are certain limits of the types of activity that can be carried on by an AR, the regime allows firms that are not directly authorised by the FCA to carry on regulated activities. This approach has many benefits, not least cost efficiency and increased competition and innovation in the financial services market. However, there is growing concern that the manner in which the regime is being used has resulted in a higher risk of harm to consumers and markets.

HMT's CFE and the FCA's CP are intended to address these risks. The CP proposes changes to be made to the FCA's current AR regime which can be made without wider legislative changes. Meanwhile, the CFE aims to review the appropriateness and effectiveness of the current AR regime and seek information to determine whether wider legislative change is required.

Areas in which FCA has proposed improvements

Proposal for the Financial Services Register to include details on the nature of the regulated activities carried on by an AR. Principals would be responsible for verifying AR details and notifying changes to the FCA.
Proposal for principals to notify the FCA prior to appointing an AR and to provide FCA with more information on the ARs.
Proposals for various changes aimed at giving the principal increased and/or more effective oversight over its ARs, such as ensuring the adequate resources of the principal.
Provision of clarifying guidance on the circumstances when a principal should terminate its AR relationship with an AR, and the manner in which this relationship should be terminated.
Proposal for principals to undertake an annual self-assessment of their compliance with FCA rules.

The CP also contains a discussion chapter setting out the FCA's views on areas of potential policy change, such as changes to the regulatory hosting business model for principals. Such changes might include requiring principals to notify the FCA of their intention to provide such services.

HMT has requested feedback on the following potential reforms:

The introduction of a ''principal permission gateway'' – this would require principals to obtain FCA approval prior to appointing an AR.
The empowerment of the FCA to obtain information from and investigate ARs directly.
The application of more regulatory requirements directly upon ARs, such as the extension of the Senior Managers and Certification Regime so that it applies to ARs.
The extension of access to the FOS for the consumers of AR services.
The extension of the principal's responsibility for out-of-scope activities carried on by its AR(s).
Possible changes to the scope of AR regime, for example to restrict a particularly high-risk regulated activity to less complex business models or less high-risk products; or to impose new conditions on AR appointment, such as in relation to the size and/or complexity of the AR.

What next?

Both the CP and CFE close for input on 3 March 2022.
The FCA expects to publish a policy statement and final rules by mid-year 2022.
The government's response to the CFE and any legislative changes are likely to take place over a longer time frame.