The Financial Conduct Authority will require firms to run verification checks on appointed representatives annually after detecting a "wide range of harm across all sectors" containing this model.
In a consultation paper published today (December 3), the FCA outlined firms will be required to annually verify their ARs' details and report to the regulator whether details remain accurate and confirm the activities they permit their ARs to carry out.
The information will then be included in the FCA's register of regulated firms.
Firms will also be required to submit complaints and revenue data for each AR, and assess senior management at ARs for competence and capability.
The City watchdog said firms will need to be able to explain the AR’s business model, including any activity it undertakes, and the primary reason for the appointment.
The regulator is alarmed by the level of harm it has detected across the sectors, which it said stemmed from the lack of due diligence before appointing an AR, or from inadequate oversight after an AR has been appointed.
Sheldon Mills, executive director for consumers and competition at the FCA, said: “The appointed representative model helps bring choices to consumers, but the level of harm we are currently seeing is too high. There are real risks of consumers being misled and mis-sold with little scope for recourse.
“We have already started work looking at high risk ARs and these proposals build on that work.
"We want to ensure that principals are properly overseeing their appointed representatives, ensuring they are competent, financially stable and delivering fair outcomes for consumers.”
The information principals are currently required to report to the FCA on their ARs is limited, the regulator said.
It includes the AR’s name and contact details, its legal status, date of the appointment, whether it is an IAR, and the general financial market in which the AR operates.
“We want to ensure that we have more information about ARs. This will enable us to identify risks and focus our activities on the most relevant areas to address potential harm," it added.
Under the plans principals will be required to prepare a self-assessment document demonstrating their compliance annually.
The FCA said it was funding its increased scrutiny of firms that intend to appoint ARs with the new annual levy on principals, which was set out earlier this year.
The FCA proposed to raise a periodic flat fee of £250 for each appointed representative, and £75 for each IAR.
"To date, we have used this additional resource to target, through enhanced supervisory and authorisations engagement, high-risk principals and risky business models across sectors," it said.
The FCA will also expect ARs to be more effectively overseen by their principals.
It said firms will need to ensure when appointing an AR and on ongoing basis, that the activities the AR carries on would not result in a risk of harm to consumers or market integrity.