Principal Permissions: Changes to the UK Appointed Representative Regime

The AR regime provides a statutory exemption from the general requirement that a person who carries on regulated activities by way of business in the UK must be authorised to do so.  ARs are exempt from the authorisation requirement because an authorised firm (the principal) will have entered into an express written agreement with the AR to accept responsibility for the regulated activities the AR carries on.  The principal firm may be authorised by the FCA or the UK Prudential Regulation Authority, or otherwise authorised through another mechanism provided for in the Financial Services and Markets Act 2000.

The regulated business that can be carried on by an AR under the exemption is limited to a specific list of regulated activities set out in secondary legislation.  The permitted activities include, for example, dealing as agent in investments, arranging activities, various advising activities and credit broking.  The AR's agreement with the principal must specify the activities for which the principal is accepting responsibility and in relation to which the exemption from authorisation will therefore apply.

The AR regime is commonly relied upon to avoid the need for the entity acting as AR to be authorised by the FCA. Obtaining and maintaining authorisation can be expensive and time-consuming.  In particular, ARs are commonly used in "hosting" services (where authorised third-party providers may provide temporary or long-term solutions to allow new market entrants to carry on regulated business in the UK so that they do not need to wait for FCA authorisation), as well as in intra-group contexts (thereby avoiding an unnecessary proliferation of regulated entities in the group).  In the retail sector, AR structures are also commonly used to facilitate networks of independent investment advisers, so that each adviser does not require separate authorisation, and their use is also widespread in the consumer credit and insurance distribution markets for similar reasons.   

Despite these benefits for market participants, the AR regime has come under increasing scrutiny in recent years, with concerns that the use of ARs has become wider than was initially anticipated when the exemption was first introduced.  There is also concern that perceived lax oversight by a principal firm could lead to substantial consumer harm and that it may be difficult for consumers to take action against an AR, who may in any case lack substantial resources to pay redress.  The FCA has in recent years restricted some principal firms from appointing new ARs.

As a result, in December 2021, HMT published its Call for Evidence, which set out potential reforms to the AR regime.  Options that were mooted at that time included:

• Changing the list of permitted regulatory activities in relation to which the AR exemption applied;
  
  
• Placing more direct regulatory obligations on the AR (rather than relying on rules that apply to the principal firm in respect of its supervision of the AR). This included a suggestion that the FCA's Senior Managers and Certification Regime could be extended to apply directly to ARs;
  
  
• Introducing a new "principal permission" gateway, which would require the authorised principal firm to obtain a specific permission from the FCA before it could appoint an AR; and
  
  
• Making the principal firm responsible for all regulated activities of an AR (even if those activities went beyond the regulated activities that the AR was permitted to carry on under its agreement with the principal) so that the FOS could require the principal firm to pay redress to a consumer for loss arising in relation to any such activities.

Fortunately for the industry, in the PS, HMT has decided not to proceed with many of the potential changes in the original Call for Evidence.  In part, this may reflect the current broader focus of the UK government on targeted reduction of regulatory burdens for the financial services industry, as well as a concerns that drastic changes to the scope and operation of the AR regime may be too disruptive to existing market structures.

Instead, HMT has confirmed that it will proceed with only two key reforms:

1. It will introduce a requirement for principal firms to obtain a specific permission from the FCA before they are able to appoint ARs; and
   
   
2. It will extend the jurisdiction of the FOS to allow the FOS to investigate cases where the AR acted outside the scope of the agreement with the principal firm and carried on other regulated activities, and the principal firm was not at fault.

However, HMT has not yet published draft legislation to give effect to these changes, meaning that the precise technical details of the reforms are still to be confirmed.

THE NEW PERMISSION TO ACT AS THE PRINCIPAL OF AN APPOINTED REPRESENTATIVE

The introduction of the new FCA permission to act as the principal of an AR is similar in structure to reforms introduced by HMT and the FCA in February 2024 in relation to the financial promotions gateway.  HMT emphasises in the PS that the AR regime is based on the ongoing supervision by the principal firm acting as an effective substitute for direct supervision by the regulator.  Accordingly, the FCA needs confidence that the principal firm has the resources, expertise and controls to undertake that oversight role effectively.

However, the new permission framework raises several potential issues:

• The principal firm will need to identify sufficiently in advance that it will be acting as a principal to an AR so that it has time to obtain the required FCA permission.  This may negate one of the key benefits of the existing AR regime, which is its flexibility, allowing authorised firms to offer quick solutions to unforeseen circumstances where a party needs to carry on regulated business.  Although in theory, a firm could apply for the permission to act as a principal without intending to operate a specific AR arrangement at that time, in practice, the FCA is increasingly seeking to crack down on unused regulatory permissions and therefore the extent to which the regulator would permit this is unclear.
  
  
• HMT states that the FCA will have the ability to impose limitations or conditions on the grant of any permission, as well as the ability to vary or revoke the permission in the future.  This means that even if a firm is granted the relevant permission, it may find that the scope of the resulting permission is limited.  Although HMT does not give specific examples of the sorts of limitations or conditions that it envisages the FCA might impose, it seems likely that this could include restrictions on the type of regulated business for which the principal firm can assume responsibility under the AR arrangement, as well as restrictions on the type of clients for whom such business can be conducted.  Firms may need to think carefully about any proposed limitations or conditions at the point of applying for the initial permission, as needing to wait for a later variation of the permission may significantly impact the timeline for putting in place a subsequent AR arrangement.
  
  
• The precise detail of how the regime will operate in practice is unclear.  HMT states that it will work with the FCA to develop a detailed proposal for the design and implementation of the new permission framework and will consult on this in due course.  It is possible that the FCA may look to introduce new rules for firms that have such a permission (for example, in relation to periodic reporting, disclosures or payment of FCA supervision fees).
  
  
• While we will need to wait to see the proposed detailed framework, there is no suggestion in the PS that the regime for intra-group AR relationships would be any more "light-touch" than arrangements between a principal firm and an arm's length third-party AR.  When HMT and the FCA consult on the detailed proposals, firms and industry associations may wish to consider whether to advocate for a proportionate intra-group regime.

HMT has confirmed that the new permission framework will be embedded in the authorisation process for new firms. Therefore, a firm which is applying for new authorisation and which intends to act as a principal to an AR will be able to wrap its application for AR principal permission into its broader application and will not need to follow two separate processes.

GRANDFATHERING ARRANGEMENTS FOR EXISTING PRINCIPALS OF APPOINTED REPRESENTATIVES

HMT has confirmed that it does not intend to require firms which currently act as principals for ARs to apply for the new permission.  This presumably means that some kind of automatic deemed permission or grandfathering regime will apply. 

However, it seems highly likely that the FCA's powers to vary or revoke the principal permission will still apply to any firms that benefit from such grandfathering arrangements (and therefore if the FCA has concerns around an existing principal firm, this could manifest itself in new limitations or permissions once the new regime comes into effect).

Firms should monitor for any further details of how any grandfathering arrangements will operate in practice, which may be contained in HMT's draft legislation or in rule changes proposed by the FCA in due course.  For example, it is possible that firms might need to notify the FCA by a specific date that they intend to rely on the grandfathering provisions.

EXTENDING THE JURISDICTION OF THE FOS

The proposals relating to the extension of the FOS's jurisdiction are less likely to be relevant to firms with ARs which are active only in the wholesale markets.  This is because the underlying customers of the ARs are unlikely to be "eligible complainants" who have the right to refer a case to the FOS for investigation.

However, in summary, HMT has now confirmed that the scope of the FOS's jurisdiction will be extended to allow the FOS to investigate the AR itself where the AR has acted outside the scope of its agreed arrangement with the principal firm and the FOS concludes that the principal is not responsible for the AR's actions.  Where the FOS upholds a complaint against the AR, the redress award may be made against the AR itself.  This will apply only in cases where the principal firm is found to have taken all reasonable steps to ensure that the AR is carrying on only activities for which the principal has agreed to be responsible.  Where the principal firm is at fault, the FOS would still investigate and make an award against the principal instead.

HMT states that the UK government intends to consult on the details of the two identified reforms in due course.  We therefore expect that HMT will publish draft legislation to give effect to the changes when parliamentary time allows, although it has not set out a specific date by which it intends to do so.

As explained above, it also seems likely that the FCA and the FOS will need to consult on changes to their own rulebooks in light of the introduction of the new principal firm permission and the extension of the FOS's jurisdiction.  It has become increasingly common for these bodies to consult while the government consults on any connected draft legislation and therefore it is possible that the proposed details underpinning these new reforms could be published as a coordinated package. Although the precise timescale is currently unclear, given the technical work that may be involved in designing the new permissions regime, it may be that we will not see the consultations on the revised rules until 2026 at the earliest.

If you have any questions in relation to the above or would like to discuss the potential impact of these changes on your organisation, please get in touch with your usual Travers Smith contact or any of the individuals named below.