Recently I’ve been pondering the correlation between an Appointed Representative (AR) and its Principal firm, and an appointed Member of Parliament (MP) and their party leader.  In my view, the need for alignment, working in unison with transparency, and establishing oversight and accountability is necessary in both instances.

Following an increase of supervisory risks and consumers harms in recent times, the Financial Conduct Authority (FCA) is making changes to the AR regime The AR regime was originally intended to enable self-employed individuals or small businesses to provide certain regulated financial services without the need for their own authorisation. However, over the years the use of the regime has morphed, with the size and scale of many ARs being vastly different to that originally envisaged, and the oversight by some Principals of their ARs not being robust enough to mitigate undue risk of harm to consumers.

This has resulted in, amongst other things, some ARs offering unsuitable products and services, and/or conducting unregulated activity which is outside of the scope of the Principal’s permissions.

The FCA’s changes to the regime require Principal firms to comply with various information and notification obligations and to enhance their AR oversight.  As with all regulation, there is a cost burden in implementing new rules.  The benefits of the changes to the regime are largely obvious and should create positive outcomes.  However, some Principals may be considering whether the increased costs, both financial and non-financial, outweigh the benefits to them in maintaining a Principal/AR model.

In particular, it is often the case, and there is a clear linkage between the two, when there is an increase in financial stress that there is an increased prevalence of misconduct.  Misconduct by ARs will likely lead to financial and reputational implications for Principals (eg redress claims, complaints, increased professional indemnity premiums and so on).  As we enter a period of considerable economic uncertainty will Principals be prepared, willing and able to implement the new rules and continue as a Principal?

If the answer is no, this could leave some ARs orphaned and in need of quickly finding a new Principal or potentially needing to wind down their activities in an orderly manner.  It could also lead to some Principals receiving reduced income with a knock-on impact to their own financial stability.  The need to carefully weigh up the pros and cons of being a Principal will certainly come to the fore in the coming months.

Back to my earlier political comparison: the lack of alignment, unity, transparency, and oversight has been the downfall of too many MPs and party leaders in recent times, with untold harm to their constituents. Hopefully the FCA’s changes to the AR regime, which are due to come into effect from 8 December 2022, will assist in preventing the risk of failure of Principal firms and mitigate the potential harms to consumers and the markets.  I suspect it will do, but I anticipate a number of Principals and, consequently, some ARs exiting stage left like a few MPs of late.