The Financial Conduct Authority (FCA) is proposing tougher rules for the oversight of appointed representatives (ARs) because there are “real risks of consumers being misled and mis-sold”.
The City watchdog said that it is seeing “a wide range of harm” across all sectors where firms have ARs. It said that this harm often occurs because principals don’t perform enough due diligence before appointing an AR, or from inadequate oversight and control after an AR has been appointed.
In addition to these proposed changes, the FCA is exploring with the Treasury whether legislative change is needed.
An AR is an unauthorised firm that operates under the regulatory umbrella of an authorised firm, known as the principal. The principal takes responsibility for the oversight of the AR. A number of peer-to-peer lending platforms have operated using the AR model.
The regulator said its proposed changes would improve principals’ oversight of ARs and require principals to provide the FCA with more information on their ARs, allowing the FCA to spot risks more quickly.
It will also expect ARs to be more effectively overseen by their principals.
The FCA is also seeking views on the wider risk posed by some of the business models operated by principal firms, and whether setting limits on these arrangements may help to reduce potential harm.
The FCA’s data analysis has found that principals generate 50 to 400 per cent more complaints and supervisory cases than non-principals, demonstrating that there are more issues arising from principals and ARs than from other directly authorised firms.
“The appointed representative model helps bring choices to consumers, but the level of harm we are currently seeing is too high,” said Sheldon Mills, executive director for consumers and competition at the FCA.
“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.”
In its Lessons from Greensill Capital report, the Treasury Select Committee of MPs recommended that the FCA and the Treasury consider reforms to the AR regime to limit its scope and reduce the opportunities available to abuse the system. The FCA said it welcomes this recommendation and is reviewing the regime as a business priority.