Insight

Consumer protection - the regime for appointed representatives

Published

21 December 2022

Read time

5 minutes

Treating customers fairly is at the heart of the Financial Conduct Authority’s (FCA) duty in relation to financial services.

The FCA however found there to be an element of potential harm caused towards consumers in areas where Appointed Representatives (AR’s)1. and principals operate. In order to strengthen this consumer protection, the FCA began their initiative into improving how AR’s and principals operate.

What is Consumer Protection?

All consumers in the United Kingdom possess the right to buy services or goods. Effectively, these rights need to be monitored. The Consumer Rights Acts 2016 empowers the FCA to act as the body who monitors these rights. The FCA’s main objective is to ensure that these consumers are being protected and treated fairly. The following 6 outcomes form what is known as the FCA’s expectations of what firms should look to incorporate within their business model.

  1. Consumer confidence being central to corporate culture.
  2. Services and products meet consumer's needs and expectations.
  3. Consumers are kept well informed at all points of the transactions.
  4. Where receiving advice is concerned, this advice is suitable to the customer’s needs, expectations and circumstances.
  5. Consumers receive products which are of an acceptable standard as they have been led to expect.
  6. The consumer does not encounter any difficulty post-sale which is imposed by the regulated firm.

The Appointed Representative – the benefits vs. the harm

The question now arises as to what exactly is an Appointed Representative (AR)? An AR is a person or a firm who acts as an agent and undertakes activity on behalf of the FCA authorised principal. In financial services terms, an AR will distribute services, for example mortgage broking, on behalf of the principal in order to expand their overall objective and promote their services. As of December 2021, there are approximately 40,000 ARs operating under 2,600 principals in the UK.1.

There are many benefits to the AR. They are cost-effective for regulatory purposes; their existence promotes competition within the financial market by attracting new entrants; it allows principals to be innovative in trialling their business propositions and has proved to increase the FCA’s engagement with firms.

Whilst there are many benefits, the FCA have found that there may be an essence of harm which comes along with it. Reason being, they do not face the authorisation that principals do in spite of engaging in regulated activities. The FCA recognised this and found a ‘significant’ level of harm caused to the consumer due to the uncertainty around what principals obligations are when monitoring the AR.2. Inevitably, this uncertainty leads to inadequate controls where overseeing the actions of the AR are concerned. The FCA have picked up on this to be threatening to the consumer’s protection, as the practices of the AR can arguably compromise the consumers service/product offered.

For example, AR-s may miss-sell a mortgage, recommend a pension transfer which is not fit for purpose, fail to deliver clear and concise information regarding general insurance products – all of which compromise the FCA’s 6 outcomes for the fair treatment of customers.

Greensill Capital Services Limited (GCSL)

GSCL is an infamous example of an AR who left a vast imprint on the financial market. Their collapse highlighted the holes in the current monitoring of ARs as investors suffered a detrimental cost of approximately £1b.1. GCSL affirmed that the current AR regime in place was being used for purposes beyond its’ original construct. Hence, reasoning for why the FCA championed for change – to avoid the arbitrary abuse of the system.

Following Greensill, the FCA’s consultation began in December 2021. From the consultation, it was found that in 2018-19, 61% of FSCS claims resulted from principals and ARs. It was also found that principal intermediaries produced more complaints per £1m of revenue from regulated activities compared to non-principals.2. This qualitative data further formed evidence for the FCA that change was deemed necessary.

Ultimately, the intended outcome for the FCA is to improve consumer protection under the current AR regime by strengthening the oversight and control where providing advice and selling products are concerned.

FCA’s New Rules

Following the consultation, the FCA published their new rules for the AR regime which took a focus to precisely specify what the principal’s responsibility is for the oversight of their AR. These rules took effect on the 8th of December 2022.

What exactly are these new rules and how will it enhance consumer protection? The below sets out an overview of examples of the main changes.3.

Changes to notifying a new AR

When a principal proposes to add an AR to their network, under the revised rules, the principal must notify the FCA 30 days prior to appointing the new AR. This is provided they have completed their due diligence process to the expected standards. Where the AR application involves an Approved Person (AP) application, the FCA sets out a 3 month period to further determine these application. As per the existing rules, the AR can only conduct regulated activities after the AP has been approved.

This will allow the FCA to identify and spot the potential risks within the principal and AR from the onset. The FCA can challenge the principal should they have any reservations which ensures consumers are not being delivered faulty or harmful products/services from early.

Enhanced review of AR

The notification process (which also applies to existing AR-s) must ensure that the principal is providing an in-depth proposal to the FCA for their review. This includes information such as the reasoning behind why the principal intends to appoint the AR, what type of services they will provide, whether they were part of a previous AR and if so, why was there contract terminated, the financial arrangements between the principal and the AR, whether the AR will undertake any non-regulated activities as well as an assessment of their structure of senior management.  

Through this, the FCA are able to successfully scrutinise the AR and also ensure that they are meeting the FCA’s expectations on how they operate with the principal as well as a business itself. This will ensure that consumers are being offered excellent levels of service and are offered products which are fit for use, as the FCA are able to assess this prior to the services being readily available to the consumer.

More data and reporting required

The FCA will also strengthen their position on reviewing existing AR’s as a section 165 data request will be required to be submitted. This enables a large scale of data to be reviewed, further amplifying the FCA’s supervisory regime.

Further, principals are to verify their AR’s data on the Financial Services Register annually. This includes submitting all data on the AR’s revenue on all types of financial activity. The principal must also submit all of their AR’s complaints data to the FCA annually. This clarifies and strengthens the responsibilities of the principal which therefore aids in avoiding any potential oversight and future confusion as to what is expected of them. Through this, the principal will be able to ensure there are adequate controls, resources and systems in place.

Where these rules will now be more transparent, the FCA have stated that consumers will be able to access better quality information from AR’s on a timely manner and have the ability to make good and well informed financial decisions. One can argue that the FCA’s concern for consumer harm will be limited vastly, thus the number of complaints, as market harm will be reduced. Issues will be reported and identified on a regular basis, thus lowering the possibility for a consumer to be mis-led or mis-sold.

Author’s comment

Whilst there is more of a commitment required from the principal, it must be noted that these new rules do not change the fact that principals are responsible for their AR’s, it is merely to form transparency for these responsibilities.

The requirements from the FCA are not intended to prohibit the principal in any shape or manner. In fact, it is to enhance the quality of theirs and the AR’s services provided there is consistency with fulfilling the rules and requirements. Not only will their services improve, these new rules will allow principals and AR’s to actually strengthen their relationship with the FCA itself. A strengthened relationship equates to a protected consumer.

Hirra Mahmood

Hirra Mahmood

Professional Indemnity Claims

E: [email protected]

 

1. Including introducer AR’s
2. Financial Conduct Authority, Consultation Paper CP21/23
3. Ibid
4. Ibid
5. Ibid
6. It must be noted there are further requirements set out by the FCA, but this article focuses on the main changes.

References

  1. FCA Principles for Customers and PRIN for Firms | FCA
  2. CP21/34: Improving the Appointed Representatives regime (fca.org.uk)