Appointed Representatives: UK government outlines two ‘targeted’ proposals for reforming the current regulatory framework

Chapter 1 What should firms be thinking about and how can Hogan Lovells help?

There is no word in the HMT policy statement on the timings of the two main proposed changes to the ARs regime, or even when we can expect consultations on the details. However, in the meantime there is still some food for thought for both existing and future principals and ARs:

• FCA permission to act as principal
  • Under this proposal, authorised firms wishing to use ARs will need to first obtain permission from the FCA – that is, obtain a formal permission from the FCA to act as principal. This does not appear to amount to a new form of regulated activity in its own right; instead, section 39 of the Financial Services and Markets Act 2000 (FSMA) would be amended to make the exemption for ARs conditional on the principal first having obtained the FCA’s permission.
  • The HMT policy statement says that firms who already act as principal will not be required to apply for the new permission – which suggests that there will be some kind of grandfathering arrangement. However, it looks like the FCA will have the power to take away from those firms the ability to act as principal (which, in effect, the FCA could do today using a variation of permission).
  • The proposed new regulatory gateway for principal firms will mean that authorised firms looking to act as a principal (and, indeed, existing principals) will need to ensure that they have the necessary expertise, resources and systems in place to provide effective oversight of ARs. The combination of our legal and consulting teams is ideally suited to assist you in reviewing your planned or current arrangements for AR oversight, and how these might have to be improved. Our combined offering can provide you with a full range of services, and clear guidance on how the solutions can be applied within your business.
• FOS coverage of ARs that act outside of their contract with the principal
  • According to the HMT policy statement, there was some support from respondents to the 2021 call for evidence for in some way extending FOS protection to cover situations where an AR engaged in a regulated activity for which the principal had not accepted responsibility, and which then resulted in loss to a consumer.
  • Under this reform proposal, consumers will be able to take a complaint to the FOS if they are unable to resolve a dispute involving an AR in a situation where the authorised firm is not responsible for the issue in dispute (e.g. because the scope of the AR’s appointment by the principal does not cover the activities complained of).
  • The key proposal is that in cases where the FOS decides that a principal firm cannot be held responsible for its AR’s actions, the FOS will be able to directly investigate the AR itself. If the FOS upholds a complaint against an AR, the FOS will be able to direct any redress measures to the AR itself. This will be a significant departure from the current approach.
  • This proposal may also be connected to the recent case of KVB Consultants v Jacob Hopkins McKenzie, where a principal was found liable for something they had not accepted responsibility for under the AR agreement – take a look at our article on the case: New court decision widens the potential liability of principals for their appointed representatives.
  • One problem identified in the call for evidence is that, where there is uncertainty about whether an AR / principal agreement covers an activity that is the subject of a FOS complaint, the FOS has the difficult task of trying to understand exactly what the agreement covers before it can give a view on whether it has jurisdiction to determine the complaint. While the reform proposal as currently outlined would in one way resolve this issue (as the FOS would have jurisdiction either way), it wouldn’t do away with the need for the FOS to establish the scope of the agreement - or with the potential for disputes as to allocation of liability between principals and ARs.
  • Principals should also note that HMT is keen to emphasise this proposal does not let them off the regulatory hook, stating that it ‘will not in any way diminish the high level of responsibility and oversight that principal firms are required to provide for their ARs […] in accordance with FCA rules.’

Chapter 2 The long road to wider AR regime reform proposals

The AR regime came under scrutiny as part of the Greensill Capital inquiry. One of the recommendations from the July 2021 House of Commons Treasury Committee's report was to consider reforming the regime.

The FCA consulted on changes to the ARs regime in December 2021 as it was seeing a wide range of harm across all the sectors where firms have ARs. A policy statement with final rules was published in August 2022. The new rules, which came into force on 8 December 2022, were aimed at enhancing and clarifying both the FCA’s expectations of principals and their responsibilities. There was also an emphasis on increasing the information and notification requirements on principals. According to the FCA, the Consumer Duty and the AR regime changes ‘go hand in hand and reinforce one another in increasing protection for consumers dealing with ARs’. Take a look at our article on the FCA’s final rules for more information: Appointed Representatives: FCA confirms changes to increase responsibilities of principal firms.

Over the last three years the FCA has also undertaken supervisory work on ARs, focused on:

• Improving principals’ understanding of their obligations through increased engagement with them;
• Providing stronger scrutiny of authorised firms and applicants for authorisation which indicate an intention to act as principal; and
• Deploying targeted supervision of principal firms more effectively across the sector, using improved data and analytical tools.

As the AR model is established by primary legislation, the FCA also worked with HMT to explore whether legislative change was needed. To inform this, the FCA collaborated with HMT on its December 2021 call for evidence. HMT was looking to gather information on how market participants use the regime, how effectively it works in practice and possible future reforms, namely:

• changes to the scope of the section 39 FSMA exemption for ARs;
• the FCA having greater ability to prevent poor oversight of ARs through introduction of a ‘principal permission’;
• applying more regulatory requirements (eg the Senior Managers and Certification Regime - SMCR) directly to ARs; and
• extending the ability of the FOS to investigate complaints involving the activity of ARs.

Chapter 3 What’s in the HMT policy statement?

With reference to the AR regime's role in promoting competition, supporting innovation and contributing to economic growth, the government intends to adapt the legislative framework for ARs to provide ‘a proportionate level of protection for consumers of AR firms, while ensuring that the current broad scope of the AR regime is preserved […]'.

According to HMT, the ‘targeted reforms' to the legislative framework for ARs set out in the policy statement - which reflect some of the proposals in the 2021 call for evidence - will fill two regulatory gaps in that framework.

Chapter 4 Gap 1: ensuring the suitability of authorised firms to act as principal

• The policy statement provides that, while a firm may be able to meet its regulatory obligations as a directly authorised firm, it may be ill equipped to oversee the activities carried on by another firm. According to HMT, this creates a risk of providing a route for unauthorised firms to carry on regulated activity without appropriate oversight, thereby increasing the risk of consumer harm.
• It is the government’s view that a regulatory gateway should operate for any activity important enough to have implications for the effective functioning of financial services regulation as a whole. It gives the recent reform of the approval of financial promotions as an example.
• The government has concluded that a regulatory gateway would also be appropriate for principal firms, as this would allow the FCA to ensure that authorised firms wanting to act as a principal have the necessary expertise, resources and systems in place to provide effective oversight of ARs. As a result, the regulatory framework would place greater emphasis on prevention of AR misconduct.
• This is likely to involve an amendment to section 39 of FSMA so that the appointment of ARs confers an exemption from the general prohibition only if the authorised firm making the appointment has received permission from the FCA to act as a principal.
• HMT explains that this would provide direct powers to the FCA to scrutinise a firm’s fitness to act as principal before the firm is able to appoint ARs. The FCA would be able to:
  • take a proportionate approach to the scrutiny of applications at the gateway, taking into account, for example, the purposes and regulated activities in relation to which a firm intends to appoint ARs;
  • (as with Part 4A permissions) impose limitations or conditions on the permission to ensure the principal is only able to engage ARs to carry on the type and scale of business in ways which the FCA has assessed that the principal is well placed to provide effective oversight;
  • (again, as with Part 4A permissions) vary a permission as necessary to reflect the changed circumstances of a principal firm (either on the application of the firm or on the FCA’s own initiative); and
  • withdraw a permission in certain circumstances.
• Amendment of section 39 FSMA will require primary legislation, so timing for the reform is dependent on space in the legislative programme. However, the government is already working with the FCA to design the measure and to develop a proportionate approach to implementation. This includes designing an approach to implementation which:
  • Does not require existing principal firms to apply for the new permission;
  • Embeds the principal permission in the new firm authorisation process so that there will not be a separate application process for new firms to follow; and
  • Ensures that the FCA is able to limit, vary or revoke a permission to act as principal if this is necessary.
• The government, working with the FCA, will develop a detailed proposal for design and implementation of the principal permission and will consult on the proposal in due course.

Chapter 5 Gap 2: FOS coverage of ARs that act outside of their contract with the principal firm

• As the FOS’s jurisdiction only applies to authorised firms, there is nothing the FOS can currently do to further assess and decide a complaint relating solely to an AR, once it becomes clear that the principal firm is not responsible.
• The government sees this as a gap in the consumer protection arrangements for regulated activities, albeit a relatively limited one in terms of the number of affected FOS cases.
• The government has concluded that the FOS should be able to investigate complaints made in relation to the carrying on of regulated activities, regardless of whether the regulated activity is directly carried on by an authorised firm, or through ARs.
• The government intends to use a targeted extension of the FOS compulsory jurisdiction to ensure that all consumers of regulated financial services, whether dealing with an authorised firm or an AR, have access to the FOS on a consistent basis. Key points in the proposal for reform are as follows:
  • As is currently the case, the FOS will continue to handle a complaint involving an AR by investigating the principal firm which has responsibility for the AR.
  • Where the FOS decides that a principal firm is responsible for misconduct involving an AR, the FOS will continue to direct any redress measures to the principal firm.
  • In cases where the FOS decides that a principal firm cannot be held responsible for its AR’s actions, the FOS will be able to directly investigate the AR itself.
  • If the FOS upholds a complaint against an AR, the FOS will be able to direct any redress measures to the AR itself.
• HMT emphasises that this extension of the FOS’s jurisdiction will only apply in circumstances where a principal firm is not held responsible by the FOS for the actions of its AR. It states that the proposed reform ‘will not in any way diminish the high level of responsibility and oversight that principal firms are required to provide for their ARs […] in accordance with FCA rules.’
• The government, working with the FCA and the FOS, will develop a detailed proposal for the extension and will consult on the proposal in due course. HMT states that the proposed extension will be designed and implemented to be consistent with the conclusions of HMT’s FOS review published (as part of Mansion House) on 15 July 2025.

Chapter 6 What’s next?

• Implementation of a principal permission: As mentioned above, the section 39 FSMA amendment will require primary legislation so exact timing will be subject to Parliamentary priorities in the legislative programme. The government, working with the FCA, will develop a detailed proposal for design and implementation of the principal permission and will consult on the proposal in due course.
• Targeted extension of the FOS compulsory jurisdiction: The government will consult on a detailed proposal for the extension of the FOS jurisdiction to ARs in due course.

HMT points out that these two targeted reforms follow the approach set out in the government’s Regulation Action Plan (see our article: The UK government’s Action Plan for regulators – a new approach?).