HM Treasury to tighten UK's appointed representatives regime

HM Treasury (HMT) published a policy statement on 11 August on its proposals to amend the appointed representatives (AR) regime.

Current regime

The current AR regime allows firms to undertake certain FCA-regulated activities under the oversight and responsibility of regulated principal firms. The AR essentially "piggy-backs" off the principal's relevant permissions, as specified in an appointed representative agreement with the principal.

Impetus for change

Issues can arise where oversight of an AR by its principal is insufficient. Criticism was directed at the Financial Conduct Authority (and the AR regime) following administration of Greensill Capital, an AR that collapsed in 2021 following reported inadequacies in the supervision by its principal.

HMT conducted an inquiry into Greensill, noting in its final report that the AR regime "may have been used for purposes which are well beyond those for which it was originally designed".

In 2022, the FCA reported that ARs (and their principals) generate 400% more supervisory cases and complaints than firms directly authorised by it.

As a result, there has been a subsequent tightening of the FCA's approach to AR regulation, with more detailed regulatory reporting requirements, more scrutiny by the FCA on individual AR appointments, and principals experiencing increased levels of supervision (directly and via information requests).

Despite these changes, the FCA commented that some firms still were not "getting the basics right" and were "taking a 'bare minimum'" approach to regulation.

What is HMT proposing?

HMT has concluded that there are two regulatory gaps in the AR framework: ensuring that firms acting as principal for an AR are suitable and that the FOS has jurisdiction over all matters arising from AR activity.

 The following changes are therefore proposed:

• establishing a new FCA gateway, so that firms wishing to act as "principal firm" to ARs will first need to apply for permission from the FCA for an additional authorisation. (HMT has said that it aims to design an approach that does not require existing principal firms to apply for the new permission so as not to disrupt business activity); and
• extending the Financial Ombudsman Service's (FOS) compulsory jurisdiction directly to ARs in circumstances where the principal is not responsible for the AR activities (for example, because it has acted outside the scope of its AR arrangement with its principal firm). This will mean consumers can report a complaint to the FOS if they are unable to resolve a dispute even where the authorised firm is not responsible for the relevant issue.

The government, working with the FCA, will now develop detailed proposals and consult on these in due course.

Osborne Clarke comment

In light of the Greensill report and the ongoing criticism of AR supervision, HMT has seen fit to tighten the regulatory regime in the interests of consumer protection.

However, it is notable that the proposed changes are much more targeted than the wide-ranging reforms mooted in HMT's 2021 call for evidence which considered, among other things, further limiting the range of activities that ARs could be permitted to undertake, extending the Senior Managers and Certification Regime to them, and placing regulatory obligations directly on them.

Arguably, narrowing the reforms in this way is implicit recognition by HMT of the important role the AR regime plays in the UK's financial services sector. The model helps new entrants to quickly gain access to the market, without a time-consuming and expensive authorisation process, while also providing new business with the support, experience and compliance oversight of a directly authorised principal.

With regards to extending the FOS' jurisdiction to ARs acting outside their appointment, HMT already acknowledges that this would only apply in rare cases. It also comes against a backdrop of recent case law making it more challenging for principal firms to avoid responsibility (and by extension, FOS jurisdiction) for what their ARs do or do not do.

A consultation paper is expected later in the year.

Should you wish to discuss the above in the meantime, please do not hesitate to get in touch with your usual Osborne Clarke contact.

Megan Gibbons, trainee solicitor at Osborne Clarke LLP, assisted in writing this Insight.