The FCA is concerned about the harm that may be caused to consumers and markets by the use of the appointed representatives (AR) regime. This is a model used by around 3,600 principals and 40,000 ARs across a wide range of financial services markets. To address some of its concerns, the FCA is consulting on changes to its rules (CP21/34) and HM Treasury (HMT) has published a call for evidence (CfE).

Key takeaways for firms and their ARs

  • The current proposals focus on clarifying and strengthening existing arrangements rather than bringing wholesale change. More change should, however, be expected as both the FCA and HMT develop their thinking in this area.
  • Firms involved in AR arrangements should consider how the proposals will affect them and, where necessary, should expect to review and adjust their processes and contractual arrangements.  Principals with large numbers of ARs should, in particular, start their planning now.
  • Firms considering new AR arrangements should bear in mind that the AR model is likely to become more restricted over time. Small principals with larger ARs, overseas ARs and regulatory hosting arrangements are expected to be most affected by any future tightening of the regime.
  • The proposals in CP21/34 form part of a wider intervention to tackle issues identified by the FCA. As set out in its 2021/22 Business Plan and 2020/21 Perimeter Report, the FCA is targeting supervisory action to ensure that principals and ARs are financially stable and competent. To fund this work, the FCA has introduced a new fee for principals with ARs.
  • Principals should also consider the impact of the new Consumer Duty, expected to apply from April 2023, on their AR arrangements. Will their AR arrangements allow them to deliver good outcomes for retail consumers? (See our recent blog post on the new Consumer Duty here.)

The response date for both CP21/34 and the CfE is 3 March 2022. The FCA plans to publish final rules in H1 2022, so the changes could as early as H2 2022. HMT will decide whether amendments to the Financial Services and Markets Act 2000 (FSMA) are required once it has considered responses to its CfE.

Why is the AR regime being reformed?

First introduced in the 1980s, the AR regime was designed to allow self-employed sales representatives to engage in regulated activities without having to be authorised, in particular to allow insurers and other product providers to distribute products through ARs. Since then, novel and ‘riskier’ business models, such as regulatory hosting arrangements, have developed.

Through its earlier work – including a thematic review in the general insurance sector in 2016 – and ongoing supervisory and enforcement work, the FCA has found that:

  • principals do not always understand their regulatory responsibilities for their ARs; and
  • many principals do not provide sufficient oversight of their ARs or adequate controls over the regulated activities for which they have accepted responsibility.

The Treasury Select Committee recommended in its Lessons from Greensill Capital report that the FCA and HMT consider reforms to the AR regime, with the aim of limiting its scope and ‘reducing opportunities for abuse of the system’.

What are the proposed changes to the FCA rules?

The proposals build on existing requirements rather than introducing new rules. The FCA is consulting on two changes:

  • Requiring additional information on ARs and notification requirements for principals:
    • Enhanced information gathering: Currently, principals only provide the FCA with high-level information on the market in which the AR operates. The FCA is proposing to require principals to provide additional details on the business each of their ARs will conduct both on appointment and on an ongoing basis, including when these details change (e.g. revenue, number of customers and complaints).
    • Notifications: The principal will be required to notify the FCA of a proposed AR appointment at least 60 calendar days before the appointment takes effect. This is much longer than the current requirements, which only apply for certain categories of AR.
    • Significant changes reporting: Principals will be required to report to the FCA any planned changes to the AR’s name or to the categories of regulated activities the principal allows the AR to use, at least 10 calendar days before the change takes effect.
    • Financial Services Register: Information about the nature of the regulated activities the AR carries on is to be included in the Register.
  • Clarifying and strengthening responsibilities of principals and additional guidance on FCA expectations in the following areas:
    • Principals’ responsibilities for their ARs
      • Put appropriate safeguards in place when they ‘delegate functions or tasks’ to an AR
      • Assess AR senior management’s fitness and propriety, competence and capability
      • Take ‘reasonable steps’ (‘reasonable steps’ not currently defined, but CP21/34 proposes guidance on what reasonable steps may include) to ensure their ARs act within the scope of their appointment
    • Effective oversight by principals of ARs 
      • Assess the adequacy of controls and resources to oversee ARs annually
      • Complete an ‘oversight appropriateness’ review in certain circumstances (e.g. on significant growth of AR)
      • Have systems and controls in place which anticipate the oversight of ARs to a comparable standard as if they were an individual directly employed by the principal and the activities being undertaken by the AR were in-house at the principal
      • Ensure that the activities the AR carries on do not, or would not, result in ‘an undue risk of harm to consumers or market integrity’
      • Review fitness and propriety of senior management at ARs and spans of control (i.e. the ability of relevant persons at the AR to carry out regulated activities for which the firm has accepted responsibility) annually
      • Principals to arrange ongoing oversight of their ARs
    • Termination of AR contracts and winding down
      • Principals to be clear on when they should terminate an AR relationship
      • Principals to ensure that they terminate relationships with an AR in an orderly way
    • Self-assessment by principals
      • Prepare an annual self-assessment document, for review and approval by the board

What do the changes mean in practice?

ARs should consider whether they need to make changes to their processes and contractual arrangements. For example:

  • Are there adequate processes in place to ensure that senior management and boards take responsibility for signing off the firm’s self-assessment documents or to ensure that an oversight appropriateness review takes place once it has been triggered by events?
  • Are IT systems changes required to ensure appropriate notifications are made to the FCA, correct data is collected (e.g. data which allows monitoring of increases in the size/volume of an AR’s regulated business in a short timeframe or unusually high staff/senior manager turnover)?
  • Is the principal firm able to terminate an AR arrangement where the principal considers it can no longer adequately oversee the AR (this requirement will only kick in from the next contractual renewal date/revision point)?
  • Are there enough appropriately experienced and trained staff responsible for overseeing and monitoring ARs, taking into account the extra responsibilities? Training will also need to be refreshed to take account of the new proposals.

Are these reforms the first steps towards banning AR arrangements?

A full ban on ARs seems unlikely. The FCA and HMT both acknowledge that the AR regime serves an important function which can benefit consumers. It provides a cost-effective way to comply with regulation and can encourage competition and innovation. The AR regime is also an important mechanism enabling providers of all kinds of non-financial services to help customers access financial services.

What other potential reforms might we see?

FCA Rules

The FCA is also asking for views on the following:

  • Prudential standards: The FCA will consider whether to introduce or strengthen prudential standards to reflect the harm posed to consumers and markets by firms with business models that include ARs.
  • Regulatory hosting arrangements: The FCA is seeking views on whether regulatory hosts can exercise adequate oversight over their ARs and remain commercially viable.
  • Smaller principals with larger ARs: Where an AR is disproportionately large relative to its principal, the FCA is concerned this could lead to harm. Where a principal becomes overly reliant on the AR to sustain its business, this might undermine the independence and effectiveness of its oversight. The principal may also not have the skills and resource to oversee the larger AR.
  • Overseas ARs: The FCA has noticed that some principals, particularly in the general insurance, consumer investments and wholesale markets sectors, have been appointing. or looking to appoint, overseas ARs. It is keen to ensure that these ARs do not use this as a way to access UK markets without seeking authorisation.
  • Potential policy options: To address these issues, the FCA is asking for views on a number of options, including the following:
    • ban the use of regulatory hosting services
    • require FCA consent to provide regulatory hosting services or to have larger ARs than the principal
    • limit the range or scope of regulated activities that regulatory hosts can oversee and/or the number of ARs they can have
    • impose additional requirements on regulatory hosts
    • prohibit the engagement of ARs which operate businesses which are materially distinct from that of the principal
    • limit the maximum size of ARs before requiring them to become fully authorised in their own right

Each of these options brings its own difficulties.  For example, how big is too big if limits are to be placed on the size of an AR and would imposing a ban on “regulatory hosting” lead to reduced competition in some markets to the detriment of consumers?

Legislative changes

In its CfE, HMT stresses that the government has not yet decided whether the regime needs further reforms. However, it may consider the following legislative changes:

  • The scope of section 39 FSMA could be altered, for example:
    • ARs can be prohibited from carrying on certain activities or certain activities may be restricted to less complex business models or less risky products;
    • new conditions (e.g. a size limit may be introduced for ARs) may need to be met in order for the exemption to apply; or
    • a requirement for the principal to be carrying on the same regulated activities as its ARs may be introduced.
  • FCA’s role may be enhanced, for example, by introducing a principal permission gateway or extending the FCA’s information gathering/investigation powers to apply directly to ARs;
  • More regulatory obligations could be placed directly on the AR to strengthen the incentives for ARs to understand and comply with regulatory rules; and
  • The Financial Ombudsman Service’s ability to investigate complaints involving the activity of ARs could be extended.


Clive Cunningham
Clive Cunningham
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Barnaby Hinnigan
Barnaby Hinnigan
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Grant Murtagh
Grant Murtagh
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Alison Matthews
Alison Matthews
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Patricia Horton
Patricia Horton
Professional Support Lawyer
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