Amendments to the Regulation of Principals and Appointed Representatives

HM Treasury has published a statement on reforming the regime for appointed representatives (“ARs”). This follows a call for evidence by the previous government in December 2021. 

The government has concluded that there are two key gaps in the regulatory framework which will be addressed, as follows:

• A regulatory gateway should be introduced so that firms wishing to act as a principal must have permission to do so. 
• The FOS will be able to investigate an AR where the AR’s conduct is something for which the principal did not accept responsibility. At the moment, the FOS can investigate the principal firm where there is a complaint involving an AR, but the FOS must decline the complaint where the AR has conducted activities outside the business for which the principal has agreed to take responsibility.

The harm the proposals are seeking to address is that in a small minority of cases principals do not provide adequate oversight of ARs, leading to AR misconduct and poor consumer outcomes. At present, FCA rules require principals to have robust systems and processes to ensure an AR’s suitability and that an AR continues to meet regulatory standards, but the Treasury’s view is that the FCA will be better able to ensure appropriate standards are maintained if it is necessary for specific permission to be required to act as a principal. It is said that this change will allow the FCA to scrutinise a firm’s fitness to act as a principal, to impose limitations or conditions on the permission, or to vary or limit it.

The document indicates that the amendment will not require existing principal firms to apply for new permission, and will embed the principal permission in the new firm authorisation process so that there will not be a separate application process for new principal firms.

It will be a relief to the industry that the government has listened to responses cautioning against alternative reform options in the call for evidence. For example, the government is not proceeding with suggestions to extend principal responsibility to all regulated activity of an AR, whether or not the principal firm had accepted responsibility, or giving the FCA new powers applying directly to ARs to request information or to investigate them (undermining the point of the AR regime).

In terms of timeframes, the permission requirement will entail amendment to section 39 of the Financial Services and Markets Act 2000, which will mean legislative time is needed. The government says it will also work with the FCA to develop a detailed proposal for implementation, for future consultation. In relation to the FOS extension, the government says it will work with the FCA and FOS to develop a detailed proposal on this for consultation.

Responsibility of principals for ARs is a hot topic, which had already been a target of regulatory focus by the FCA over the past year or so. In addition, in July the Supreme Court heard the appeal in the matter of Kession Capital v KVB Consultants¹. This matter concerned an AR agreement which prohibited the AR from dealing with retail clients, and the issue was whether the principal was nonetheless responsible for acts and omissions arising from the AR dealing with retail clients. By majority (with a dissenting opinion), the Court of Appeal found that there was a distinction between the what and the how: a principal can limit its liability for what activity its AR carries out, but not how it carries out the activities under the principal’s appointment – and the retail client stipulation was a how, so that the principal was liable. The Supreme Court judgment is awaited with interest.

Footnote

1. Our previous articles with fuller details of the decision are here and here.