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His Majesty’s Treasury (HM Treasury) has issued an Appointed Representative (AR) Regime Policy Statement in response to its December 2021 Call for Evidence on the regulatory approach to ARs. The underlying drivers behind the Call for Evidence being the recent scandal involving the AR regime and the egregiously high levels of consumer complaints involving ARs. HM Treasury received thirty-eight responses to its Call for Evidence, which were overall positive and supportive of the AR regime and summarised in the Policy Statement “as an important and beneficial element of the UK’s regulatory approach”.

The Financial Conduct Authority (FCA) has already acted quickly to improve their oversight and operation of the AR regime while this HM Treasury Policy Statement is intended to complement that work by addressing perceived gaps in the AR regulatory framework.

It is noteworthy and reassuring that HM Government expresses a wholly supportive view of the AR regime, which offers “a proportionate and cost-effective way for firms to engage in regulated activity without being authorised, allowing a broader range of providers to enter the marketplace. In doing so, the AR regime promotes competition, supports innovation, and contributes to economic growth.”  Clearly the AR regime is here to stay.

Sentinel was established precisely for the reasons outlined above, alongside providing professional, experienced oversight, recognising that the AR regime facilitates new entrants’ quick access to UK markets. Such unambiguous government support for the regime can only help foster confidence. In our view, HM Treasury’s recommendations seem proportionate, pragmatic and serve to bolster the operation of the AR regime to the benefit of ARs, consumers and, ultimately, the UK financial services economy.

An Overview of the AR Regime

The AR regime was first introduced by the Financial Services Act 1986 and subsequently amended by the Financial Services and Markets Act 2000, so it is a well-established option for new market participants. HM Treasury reports that there are currently around 2,400 Principals responsible for 34,000 ARs, which represents a significant segment of UK financial services markets.

An AR is a firm that carries on regulated activities under the responsibility of an authorised financial services firm. However, the range of regulated activities an AR can provide are essentially limited to investment advice and arranging transactions.

An authorised firm which appoints ARs (as above) is known as a ‘Principal’ (such as Sentinel). The Principal assumes responsibility for the regulated activities agreed and carried on by the AR.

The significant majority of Principals and ARs operate in the retail client sector where the regime has its origins. In our view, retail facing ARs will necessarily face increased levels of regulatory risk and are therefore more likely to generate higher levels of customer complaints. Although, it is important to note that this Policy Statement does not differentiate between retail and professional client facing Principals and ARs.

Plugging the AR Regime Gaps

HM Treasury has concluded that there are currently two regulatory gaps in the AR regime which, when filled, will provide a targeted and proportionate way of enhancing the AR regime.

1.  Creating a new FCA “Principal” permission

HM Treasury points out that, currently, any FCA authorised firm with the appropriate FCA permissions can provide Principal services by dint of the fact of their FCA authorisation.  Irrespective of whether they know what is involved or have the required skills and resources to monitor and support their ARs. This has led to a cottage industry of “accidental” Principals where a firm might support a “friend of a friend” as an AR while they establish their new business. In other cases, firms whose primary business is unsuccessful might diversify their offering by acting as an “amateur” Principal to generate revenue.

HM Treasury has proposed the FCA would have the power to scrutinise a firm’s fitness to act as a Principal before the firm is able to appoint ARs. This would allow the FCA to impose limitations, conditions or vary the “Principal” permission to ensure they can only engage ARs in a controlled manner.

Sentinel, having undergone FCA authorisation with the stated intention of acting as a Principal to Professional client facing ARs, wholeheartedly supports increased regulatory scrutiny over new Principal applications.  Particularly involving higher risk markets and ARs focused on retail clients.  This Principal authorisation approach can only serve to raise professional standards and help weed out the amateur and accidental Principals.

2. Extending Financial Ombudsman Service coverage of ARs acting outside their Principal’s contract

The Financial Ombudsman Service (FOS) powers currently apply in relation to authorised firms. This means the FOS can investigate complaints in relation to Principals and their ARs acting within the scope of their agreed activities. However, the FOS cannot investigate ARs acting outside the scope of activities agreed with their respective Principals. Therefore, in such instances, HM Treasury has proposed to extend the FOS’s powers so that, where the FOS decides that a Principal firm cannot be held responsible for its AR’s actions, the FOS will be able to investigate the AR directly. If the FOS upholds a complaint against an AR, it will be able to direct any redress measures to the AR itself. We fully support this extension of the FOS’s authority as a practical step to address rogue AR behaviour.

Conclusions

The HM Treasury Policy Statement is entirely welcome and will, in our view, help as stated “provide certainty to firms and consumers on the future of the UK’s AR regime.”  We look forward to seeing these proposals implemented following the necessary consultations and legislation.