The future of the Appointed Representatives regime: HM Treasury consults on a new regulatory framework

HMT proposes introducing a regulatory gateway, requiring authorised firms to obtain a specific permission from the Financial Conduct Authority (FCA) before acting as a principal and appointing ARs. 

This would involve amendments to the Financial Services and Markets Act 2000 (FSMA) to introduce a new permission regime for an authorised person acting as a principal. Firms without this permission would be prohibited from acting as a principal.

The proposal would enable the FCA to assess whether prospective principals have appropriate expertise, resources, governance arrangements and systems to oversee ARs effectively.

Importantly, HMT has indicated that transitional arrangements are expected to apply to existing principals. These arrangements would allow existing principals to maintain their existing AR appointments (as well as appoint new ARs as necessary), although the FCA would retain powers to vary or withdraw that grandfathered permission if necessary to maintain appropriate standards of AR oversight and consumer protection.
 

HMT proposes extending the compulsory jurisdiction of the FOS to address what it considers to be a gap in consumer protection. Under the proposals, FOS would be able to consider complaints relating to regulated activities carried on by ARs where the principal firm cannot be held responsible for the AR’s acts or omissions. In those circumstances, FOS would be able to determine complaints directly against the AR and, where appropriate, award redress against it.

HMT has emphasised, however, that this change is intended to operate as a measure of last resort and is not designed to reduce the responsibility of principals for oversight of their ARs. That said, this proposal has prompted certain questions, including:

• who bears responsibility for complaints handling processes where ARs are involved;

• whether principals should have additional obligations to notify ARs of complaints and ensure their cooperation with FOS; and 

• potential implications for the Financial Services Compensation Scheme (FSCS). 
   

HMT proposes bringing ARs within the scope of SM&CR, to align the conduct and F&P frameworks for ARs more closely with those applicable for FCA authorised firms.

Currently, the legacy Approved Persons Regime continues to apply to ARs. HMT considers that applying a single framework to both principals and ARs will ensure greater consistency of standards across the market while reinforcing individual accountability.

Under the proposals:

• the SM&CR conduct rules would apply directly to staff within ARs (excluding ancillary staff);

• principal firms would be required to apply F&P assessments to AR personnel; and

• the FCA may introduce a dedicated senior management function relating to AR oversight within principal firms.
   

HMT also proposes to repeal s39A FSMA, which relates to tied agents under the Markets in Financial Instruments Directive (MiFID), as it is considered redundant following Brexit.

Following the UK’s exit from the European Union, the provision has limited practical relevance. It now only applies in circumstances where UK MiFID firms engage non-authorised UK persons to carry on investment services business outside the UK. As such, HMT considers that activities conducted overseas should instead fall within the regulatory perimeter of the relevant jurisdiction (and not the UK).