The Financial Conduct Authority lacks the legal powers to impose on advisers who are members of networks tough new rules making managers responsible for what happens in their firms, it has emerged.
The rules, known as the senior managers regime, were introduced in March 2016 initially to tighten up senior staff accountability in banks.
The plan is for the regime to be extended to financial advisers in 2018.
But FTAdviser has discovered that under the legislation which introduced the regime means the FCA can only roll it out to directly authorised financial advisers and not the thousands who are members of a network.
The government would have to draft and pass a new law to allow the FCA to act, a move which is not expected to be considered a high priority while ministers are focused on Brexit negotiations, and in particular on maintaining London's status as a preferred place to do business for financial services companies after the UK exits the European Union.
This means networks member firms are currently not included in the stated aim of the regime to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence, and may not be for some time.
The FCA published a consultation on extending the senior managers and certification regime to the financial advice profession in July, acknowledging at the time this would not apply to networks and their members and postponing this to a follow-up consultation paper, the date of which is as yet unknown.
Caroline Bradley, group risk and regulatory director at Tenet, said this would likely mean appointed representatives would continue under the approved persons regime "for the time being".
She said: “Small directly authorised firms will be limited scope firms and will have fewer senior management functions and this mirrors how the approved persons regime applies to these firms now."
She moved to provide reassurances that networks and their advisers would not become a less well regulated part of the market.
Ms Bradley said: “I do not envisage any difference in standards as appointed representatives will be members of larger firms who are caught by the regime.”
Ms Bradley said the chances of the required legislation being introduced before Brexit appeared "very slim".
The FCA did not comment on this issue or whether it is lobbying the government to introduce the regulatory changes it needs to address the loophole and, if so, whether it thinks this is likely to happen.
The regulator also did not comment on whether there would be a period when directly authorised advisers would be subject to the senior managers regime but appointed representatives would not be.
Earlier this year FTAdviser reported on concerns about how appointed representatives would be affected by the regime, since they might not be listed on the FCA register if their network becomes their "senior manager" on the grounds it handles members’ compliance.