The FCA is consulting on plans to significantly strengthen regulation of appointed representatives (ARs) after analysis showed firms employing appointed reps suffered four times as many complaints as firms not using appointed reps. 

The FCA says it is seeing a, "wide range of harm across all sectors where firms have ARs (appointed representatives)" and needs to tackle the problem.

The watchdog says its data analysis shows that, on average, there are up to 400% more claims connected to firms using appointed reps than firms not using ARs.

FCA analysis of Financial Services Compensation Scheme claims found that ARs accounted for 61% of FSCS claims in monetary term from 2018 to H1 2019. The total of FSCS claims during this period was £1.1bn

The FCA says: "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."

An appointed representative (AR) is defined as a firm or person who carries on a regulated activity on behalf, and under the responsibility of, a firm authorised by the FCA (the principal). In appointing an AR, the principal assumes responsibility for the regulated activities the AR carries out.

Proposed FCA changes to the regime will seek to address harm arising in this market while, "retaining the cost, competition and innovation benefits the AR model can provide," the FCA said.

The proposals 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, the regulator said. 

The FCA will also expect ARs to be more "effectively overseen" by their principals and will introduce annual requirements to submit details of ARs. The FCA is also exploring with the Treasury whether legislative change is needed.

The FCA is funding its crackdown by its new annual levy on principals with ARs (set out in PS21/7) at £75 per annum per IAR (introducer appointed rep) and £250 per annum per AR. 

In its Lessons from Greensill Capital report, the Treasury Select Committee recommended that the FCA and Treasury consider reforms to the AR regime to limit its scope and reduce the opportunities available to abuse the system. The FCA has welcomed the recommendation.

FCA data analysis found that, on average, principals generate 50% to 400% more complaints and supervisory cases than non-principals across all sectors where the model operates. The FCA says the figures show that there are more issues arising from principals and ARs than from other directly-authorised firms.

The FCA will seek views, through a discussion chapter in the consultation (CP21/34), on the wider risk posed by some of the business models operated by principal firms, and whether setting limits may help to reduce potential harm.

Sheldon Mills, executive director for consumers and competition at the FCA, said: "'The appointed representative model helps bring choices to consumers but the level of harm we are currently seeing is too high. 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."

Matt Connell, director of policy and public affairs of the Personal Finance Society, said: “The FCA’s work on suitability shows that the vast majority of advisers are giving very high quality advice, regardless of the regulatory regime that they operate under.

“However, given that the FCA has identified higher rates of complaints among some appointed representative firms compared to the sector average, it is right that the regulator is considering measures to address the small minority of firms engaged in poor practice and maintain a high level of trust in the vast majority of firms that are providing an excellent service for their clients.”

• Consultation Paper CP21/34: Improving the Appointed Representatives regime. Consultation closes on 3 March.

• This is a developing story, check back for updates.