UK: HMT policy statement on the appointed representatives regime

Why should I read this?

Following their December 2021 call for evidence HM Treasury (HMT) have published a policy statement , “The Appointed Representatives Regime”, in which they set out their conclusions that there are two regulatory gaps in the framework for appointed representatives (ARs):

• there is currently no way for the FCA to ensure the suitability of authorised firms to act as the principal for an AR. HMT is therefore proposing to introduce a ‘regulatory gateway’, which will require authorised firms acting as principals to ARs to have a specific FCA permission to do so; and
• there is currently no FOS coverage of ARs that act outside of their contract with their principal firm. The UK government is therefore proposing to extend the coverage of the FOS to enable the FOS to directly investigate AR firms where it decides that the principal cannot be held responsible for that AR’s actions.

Rationale for the reforms

FSMA 2000 gives broad rule-making powers to the FCA to set binding regulatory requirements for authorised persons, including when authorised persons are acting in the capacity of principal. 

However, in recent years the FCA have identified evidence of increased risk of detriment to consumers who engage with ARs as compared with consumers who engage directly with authorised firms. The FCA have taken steps to address this concern and to minimise opportunities for abuse (see, for example, our previous client briefing “UK: FCA reviews embedding of rules on appointed representative oversight”).

However, in light of the call for evidence and the experience of the FCA and FOS in dealing with supervisory challenges and complaints involving ARs, the government has concluded that reform of the overall legislative framework for ARs is required.

FCA permission to act as a principal

The government believes that requiring authorised firms wanting to use ARs to first obtain permission from the FCA will help the FCA ensure that authorised firms have the appropriate expertise and resources to effectively oversee their ARs and ensure they act responsibly, thereby helping prevent misconduct by ARs. This proposal was contained in HMT’s call for evidence and received broad support.

Regulatory gateway

Currently any authorised firm can act as the principal of an AR without needing any further permission or approval from the FCA.  While the ability of a firm to meet its regulatory obligations as a directly authorised firm will be assessed by the FCA as part of its authorisation process, that process does not assess such a firm’s ability to oversee the activities of another firm (i.e. an AR). This leads to a risk that ARs carry on regulated activities without appropriate oversight.

The government is therefore proposing to introduce a ‘regulatory gateway’ for principal firms. This will require that any authorised firm which wishes to appoint an AR, and thereby act as the principal of an AR, will first need to have obtained a specific FCA authorisation to do so. This is expressly acknowledged to be similar to the regulatory gateway introduced for the approval of financial promotions by authorised firms in February 2024.

The government believes that by ensuring that ARs can only be appointed by authorised firms which are suitable to act as a principal, the regulatory framework will place greater emphasis on prevention of AR misconduct.  By giving the FCA the ability to vary or withdraw permission to act as principal, the FCA will be more effectively empowered to act swiftly and in a more targeted way to limit or stop AR activity which might pose a material risk to consumers.

Approach to implementation

The new regulatory gateway will be implemented in a manner which provides that:

• existing principal firms will not be required to apply for the new permission (grandfathering);
• an application for permission to act as an AR’s principal will be embedded in the new firm authorisation process so that there will not be a separate application process (i.e. a firm wanting to appoint ARs will be able to obtain permission to do this when becoming authorised to carry on other regulated activities); and
• ensures that the FCA are able to limit, vary or revoke a permission to act as principal if necessary, which would presumably include grandfathered firms.

This new regulatory gateway will need to be implemented through changes to the Financial Services and Markets Act 2000 (FSMA). This will require primary legislation, meaning that “an appropriate place in the legislative programme” will need to be found for the change. As such the timing of the relevant changes is not yet clear. It is also not clear how the grandfathering referred to above will operate and whether it will grant firms already acting as an AR’s principal permission to continue to do so (likely only in respect of the ARs it has appointed at that time) or will exempt them from the need to do so.

One additional thing which is unclear is how the regime will operate in respect of group companies. The financial promotion approval gateway enables authorised firms to approve the financial promotions of members of their groups. Enabling authorised firms to appoint other members of their groups as their ARs would arguably be proportionate given that the relationships between such firms should enable greater oversight of an AR’s activities, but the policy statement is silent on this point.

How will the relationship between ARs and FOS change?

The compulsory jurisdiction of the FOS applies to authorised firms carrying on regulated activities. This means that where a complaint is received in respect of the activities or actions of an AR, the FOS will investigate the principal firm which is responsible for the AR.

Although principal firms are supposed to ensure that their ARs do not carry out regulated activities for which the principal has not accepted responsibility, sometimes they do not. This means that where a complaint is made against an AR that is carrying on regulated activities for which its principal has not accepted responsibility, the FOS is currently not able to assess and decide the relevant complaint.

The government therefore intends to make a targeted exposure to the FOS compulsory jurisdiction to ensure that all consumers of regulated financial services, whether dealing with an authorised firm or an AR, have access to the FOS. The effect of this will be that in situations where an authorised person cannot be held responsible for the AR’s actions, the FOS will be able to directly investigate the AR. If any complaints of this type against an AR are upheld by the FOS, it would then be able to direct redress measures to the AR itself. This extension is expected to be limited and the government is at pains in the policy statement to make it clear that the proposals in no way water down principals’ responsibilities or the FOS’s jurisdiction in relation to such principals.

Next steps

As set out above, the introduction of the proposed regulatory gateway for principal firms will require primary legislation to amend FSMA. Parliamentary time is, as always, in short supply, meaning that the government will need to wait until there is a suitable bill to attach the measure to or a gap in the legislative programme opens up. In the meantime, the UK government and the FCA are working on implementation of the permission regime and a consultation on the design and implementation of the principal permission is expected in due course.

The government, working closely with the FOS and the FCA, will separately develop a detailed proposal for the extension of the FOS jurisdiction to ARs and will consult on this in due course, although timings are unclear.

How Eversheds Sutherland can help

The Eversheds Sutherland Financial Services sector teams have specialist knowledge of the AR regime. We can advise principals and ARs on:

• the potential consequences of these proposed changes and structural planning for the same
• your regulatory obligations
• compliance with FCA requirements
• how to manage your relationship with the FCA
• what to do when if things go wrong