The FCA is making plans to tighten up their appointed representatives (AR) legislation following the publication of a consultation paper. Such changes would bring a little more consumer protection to those participating in AR schemes with the aim of achieving more balance across the stakeholders here.
What structure do ARs follow?
Current AR models allow financial services to offer regulated advice and services to their customers. Though the services themselves are regulated, the AR might not come under the authorisation of the FCA.
They do so by coming under the umbrella of a principal firm. This principal firm will supervise the AR and will take the liability of any third party losses that will come about as a result of the AR’s advice.
This has ultimately led to the development of networks of several ARs. Though they are all technically separate and distinct, they offer advice as part of the wider network. With some 40,000 ARs operating under 3600 principal firms, it is easy to see how extensive these networks can grow to be. The principal is supposed to manage compliance and regulatory oversights, in addition to complaints, but the FCA is seeing more and more complaints arise in relation to these networks and the wider AR model.
Failures of due diligence
With a rise in complaints regarding this model, the FCA discovered that much of the issues stemmed from the principal firms. Frequently, the principal is either failing to perform the due diligence checks needed to appoint an AR, or lacks the proper oversight and control of its ARs and their activities. The FCA also noted that those firms who operated with an AR model tended to receive a higher proportion of complaints compared to others.
Changes to be made
With these discoveries, it is vital that changes are made to address these complaints before more damage can be done. This is not a case of eliminating the AR regime. The FCA notes that it does work well, particularly in regards to cost and other benefits, and so it is more in need of a transformation compared to being shut down and replaced with something else.
Primarily, the changes should give more strength to the principal firms so they can manage their ARs more effectively. At the same time, the principals will have to answer to the FCA regarding the activities of the ARs under their umbrella. This could include the introduction of more frequent and detailed reports, and could also require principals to investigate the activities of the AR beyond what their relationship with the principal might dictate. Above all else, we shall also see the introduction of further onboarding and due diligence checks to ensure that ARs are compliant with regulations and understanding of the risks involved here.
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