Sentinel Regulatory Services news & information

In April 2022 the FCA launched a three-year strategy, called Strategy 2022 to 2025, to improve consumer outcomes across the range of the FCA’s growing remit. The strategy had several key priorities including preventing serious harm, setting higher standards, and promoting competition. For the first time the FCA also promised to hold itself accountable against a list of published outcomes and performance metrics.

Strategy 2022 to 2025 has now concluded and the FCA has reported on the final progress made against both topline outcomes (to be delivered by markets themselves and used as a measure for how the FCA delivered against its statutory objectives) and commitment outcomes (what the FCA wanted to achieve for customers and wholesale markets).

The publication is wide-ranging but this article focusses on the FCA’s commitment to ‘Improving oversight of Appointed Representatives’,  for which four metrics were identified as a measure of success:

1. Reduction in volume of complaints about Principal Firms compared to Non-Principal Firms.
2. Increase in withdrawal rate of Appointed Representative (AR) notifications and increase in rejection, withdrawal, and refusal rate of Form A’s related to ARs.
3. Increase in volume of FCA supervisory cases and intervention tools linked to ARs.
4. Increase in proportion of firms reporting improvements in the oversight of ARs in their sector.

The Outcomes

1.      The Complaints metric

The gap in complaints received by Principal & Non-Principal Firms in the adviser and intermediary sector widened during the period, with Principals generating 470% more complaints than non-Principals during 2024, compared to 44% more during 2020 – demonstrating that the FCA’s new AR Regime rules have not had the desired effect on complaints in this sector. However, it is not possible to tell from the data how these complaints are spread between Principals operating in the retail advisory and wholesale advisory sectors. Although, the FCA notes a likely driver of this is an increase in complaints about ongoing financial advice services, which are typically an element of the retail sector; therefore it is reasonable to surmise that the majority of complaints received in this sector relate to Principal Firms whose ARs operate in the retail sector.

2.      The Withdrawal metric

In 2023 there was a spike in the withdrawal rate of both AR notifications (5.9%) and Form A’s related to ARs (6.5%), but this reduced significantly in 2024 to 3.7% and 3.5% respectively – the FCA suggests that this reduction is a result of Principal Firms improving their due diligence and the FCA improving its assessment of these applications.

3.      The Supervision metric

The FCA has increased the number of supervisory cases opened in respect of Principal Firms and, in 2024, 32 Principal Firms applied to restrict their regulated activities, two skilled persons reviews took place and three Principal Firms applied to have requirements imposed at the gateway.

4.       The AR Oversight metric

The 2024/25, FCA and Practitioner Panel survey reported that 60% of Principal Firms surveyed thought AR oversight had improved because of the FCA’s actions, compared to 1% who believed oversight had worsened.

Conclusions

The past 3 years has seen a significant amount of change within the AR Regime including new requirements for Principal Firms when onboarding & monitoring their ARs, new reporting requirements in both RegData & Connect and new dedicated FCA Appointed Representative teams in both Authorisations and Supervision.

However, the FCA remains of the view that there is still more work to do to reduce harm caused by ARs, so we can expect there to be further developments in the AR Regime during the FCA’s 2025 to 2030 strategy, including:

• HM Treasury – The Appointed Representatives Regime: Call for Evidence, which was published in December 2021 (in conjunction with the FCA’s Consultation Paper, CP21/34, on changes to the Regime) to determine whether it would be appropriate to update the underlying legislation governing the AR Regime. Despite the progress made by the FCA in this area, comparatively little progress has been made by HM Treasury. However, HM Treasury has recently released a Policy Statement which Sentinel has reviewed and commented on in a separate article.
• CP21/34 asked a number of questions on potential areas of further change, which included the Regulatory Hosting model, and the FCA has indicated that it is considering what steps may be required to reduce the potential harm of this business model. The FCA conducted a review, during 2024, of several Principal Firms operating the Regulatory Hosting model and publication of their findings is expected during 2025.

As Principal Firms continue to embed the AR Regime’s new rules, the sector continues to consolidate and the FCA analyses the huge volume of data it has received from Principal Firms over the last 3 years – we can expect to see continued FCA focus on Principal Firms oversight of their ARs and to see further rule, and/or legislative, changes over the coming 5 year FCA Strategy.

Sentinel’s view is that the AR Regime provides flexibility for new firms and helps drive growth, which is now a key FCA ambition. However, given the reported high volumes of client complaints, the FCA must focus on the underlying issues and remedy them. In our view, those issues mostly relate to retail advisory business, which is a significant portion of the AR Regime and generates a high volume of complaints and risks. The wholesale sector represents a much smaller proportion of Principals and ARs, which present different challenges for the FCA.