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How could the FCA's focus on ARs affect advisers?

How could the FCA's focus on ARs affect advisers?

It is clear from the words and actions of the Financial Conduct Authority that it has set its sights on appointed representatives.

In a speech delivered in May by Sheldon Mills at a British Insurance Brokers' Association conference, the executive director of consumers and competition said: “If you use appointed representatives in your business model, we expect you to have good oversight of them, to ensure that they are following our rules on product suitability and value.

“We have recently set up a new department to oversee the AR regime and will be supervising these firms more closely to deliver better outcomes.”

As well as establishing said department, in March the FCA closed a consultation on improving the AR regime, in which it set out proposals to require principals to:

  • Provide the regulator with more information on their ARs and the business these ARs conduct;
  • Report to the regulator specific information on the activities the ARs are permitted to undertake, for inclusion on the Financial Services Register; and
  • Notify the FCA of an intention to begin providing regulatory hosting services before beginning to do so.

James Dingwall, chief executive of compliance consultancy Thistle Initiatives, says he is not surprised by the regulator’s recent focus on ARs. “It's pleasing that the FCA has now increased its supervision of the sector, but of course, this is after the damage has been done.”

How did we get here?

Analysis by the FCA found that principals generate between 50 per cent and 400 per cent more complaints and supervisory cases on average than non-principals, which the regulator said shows there are more issues arising from principals and ARs than from other directly authorised businesses.

Bovill consultant Jonathan Reid likewise says the FCA’s focus on ARs does not come as a surprise, given the collapse of Greensill Capital that made use of the AR regime.

A report called Lessons from Greensill Capital, published by the Treasury Committee in July, said it appears that the AR regime may be being used for purposes that are “well beyond” those for which it was originally designed.

Indeed, in its consultation paper the FCA notes how the regime was created primarily to allow self-employed representatives to engage in regulated activities without having to be authorised, but that over time, the regime has evolved to include a wider range of models such as regulatory hosting and networks.

Despite the common perception that Greensill Capital’s collapse led to the regulator’s review of the regime, Lindsay Lee, senior associate at law firm Brodies, says the FCA’s previous thematic reviews of the general insurance and investment management sectors had already exposed shortcomings in the AR model.

Lee adds that subsequent ‘Dear CEO’ letters and FCA analysis, which found that principals and ARs accounted for 61 per cent of the Financial Services Compensation Scheme
claims value between 2018 and 2019 H1, meant the actual and potential levels of consumer harm were “simply too high for the FCA not to take wider action”.

How could the proposed changes affect existing ARs?

It seems very likely that large networks with scale and systems already in place will be better able to handle the proposed new requirements, says David Morrey partner at Grant Thornton, especially where ARs have similar advice propositions that make it relatively easier for a principal to oversee.