AR they fit for purpose? The FCA overhauls the Appointed Representative regimeJuly 2022
Published on 19 July 2022, the latest annual report from the Financial Conduct Authority (“the FCA”) showed, among other things, that over 300 Appointed Representative (“AR”) applications were withdrawn and 1% fewer applications were made compared to the previous year.
The AR regime has a long history, first being introduced in 1986 and carried on in the seminal Financial Services and Markets Act 2000 (“FSMA”). Under the general prohibition of FSMA (s.19), no person may carry on an activity regulated by FSMA in the UK unless they are authorised to do so, or exempt. One way to be authorised is to seek authorisation direct from the FCA; another way is to carry out regulated activity on behalf of someone who is authorised by the FCA.
The latter situation describes an AR, who carries on a regulated activity on behalf of, and under the umbrella of, an authorised firm (per s.39 FSMA). The AR regime was created so that self-employed representatives could engage in regulated activities without being directly authorised by the FCA. Insurers and other product providers often found it convenient to distribute products through ARs, and ARs benefitted from the resources of their principals. Most of an AR’s activities centre around advising on and arranging/making arrangements for different financial products and services. Over the years, the regime has evolved to include a wide range of products and services across a number of sectors. The FCA has estimated that there are around 40,000 ARs, operating under around 3,600 principals.
Nevertheless, the extent to which a principal is responsible for its AR has been a contested issue in case law for many years, with some reported first instance decisions absolving the principal of liability for wrongdoing by the AR, and others holding the principal liable for AR wrongdoing. The issue was finally considered by the Court of Appeal in Anderson v Sense Network Limited  EWCA Civ 1395. There, the Court of Appeal held that the principal was not responsible for wrongdoing by its AR, as the principal had properly supervised the AR and the AR had deliberately concealed its wrongdoing from the principal. Nevertheless, the judgement was fact-specific and so it remains open to some claimants to argue that a principal should still be liable for an AR who has caused them loss.
For its part, the FCA has been concerned about the AR regime for some time. The FCA’s thematic review of the general insurance sector in 2016, and its thematic review of the investment management sector in 2019, caused the FCA concern about how authorised principals understood (or did not understand) their responsibilities for their ARs. In particular, the FCA was concerned that there was insufficient oversight of ARs, and insufficient controls over their regulated activities, by their principals.
Further concerns were raised by the Treasury Committee (“the Committee”) in its report, “Lessons from Greensill Capital”. Greensill Capital itself was an AR, and the Committee concluded that the AR regime was being used for “purposes well beyond those for which it was originally designed”. The Committee recommended that the FCA and Treasury considered reforms to the AR regime, “with a view to limiting its scope and reducing opportunities for abuse”. The FCA agreed, and noted that principals and their ARs generated 50 to 400% more complaints than directly authorised firms.
Consequently, towards the end of last year the FCA launched a consultation on improving the AR regime (CP21/34), which closed earlier this year. The FCA stated that its aim was to reduce potential harm for consumers and markets arising from the AR regime, to which end the FCA proposed two key changes. First, the FCA wanted more information on ARs and from their principals, to help the FCA identify potential risks and principals who were not supervising their ARs adequately. Second, the FCA wanted to clarify the responsibilities and expectations of principals to oversee their ARs. The FCA is currently considering the responses that it has received, and preparing its final rules.
Subsequently, in May the FCA launched a specialised AR department to tackle the harm that ARs and their principals may cause. This department will report to the Director of Insurance, and involve at least 30 new positions within the FCA. Those positions are said to last for two years, then successful candidates will be placed in “alternative roles”.
Following the FCA’s recent annual report, we can see that its increased attention on ARs and their principals has started to have an effect, with some principals removing their ARs, and applications for ARs to act for principals falling generally. It remains to be seen whether that trend continues, and what further measures the FCA will take once it has finished considering the results of its consultation.
In the meantime, the role of ARs and their principals remains a hot and contested issue for these firms and their insurers. Over the years, we have dealt with a number of cases involving diligent principals whose ARs have been up to no good behind their backs, and the resulting claims (often of a substantial and systemic nature). Until recently the contradictory case law on this issue complicated the reasonable resolution of those claims, although the Court of Appeal’s decision has assisted matters for insurers and firms somewhat. The FCA’s recent activity in this regard may complicate the position afresh as it highlights failings in the AR regime, which could provide some ammunition to claimants looking to bring such claims. Principals and ARs may also face fresh regulatory action as the FCA’s specialist department gets going. That said, it is possible that the FCA’s consultation in this area may change the AR regime to make it less risky going forward, which would help both firms and their insurers, especially as the PII market for IFAs remains difficult for all concerned.Download PDF