The FCA and HM Treasury (HMT) have issued co-ordinated papers on the Appointed Representatives (AR) regime. In what amounts to a root and branch review of the business model and how it is overseen from a legislative and regulatory perspective, both have highlighted serious concerns that the current use of Appointed Representatives bears little relationship to that intended when it was first introduced within the Financial Services Act 1986 and subsequently the Financial Services and Markets Act 2000.

HM Treasury has been spurred into action following the Treasury Select Committee (TSC) report into the Greensill Capital affair. This found that the AR regime may be being used for purposes which are well beyond those for which it was originally designed. The TSC recommended that the FCA and HM Treasury consider reforms. It’s difficult to ignore the will of Parliament.

For its part, the FCA has for some years been highlighting its concerns about the risks of consumer harm arising from the AR business model. Its thematic review of the general insurance sector in 2016 and the investment management sector in 2019 both identified significant shortcomings in principal firms’ understanding of their regulatory responsibilities for their ARs. In its 2021/22 review of fees, the FCA introduced a new levy for principal firms to help it take enhanced supervisory and authorisations action against high-risk principals.

Since the regime began in 1986, the use of ARs has increased and spread across much of the financial services sector. There are now around 40,000 ARs operating under around 3,600 principal firms. General insurance and protection make up the second largest proportion of those with around 33% of the total.

It’s not difficult to understand why the FCA feels the need to act, when its data shows that that firms acting as principals are higher risk: they are the source of more supervisory cases and more complaints than firms which do not act as principals.

For firms whose business model includes the use of Appointed Representatives, the proposals call for careful consideration of the likely impact with one possible suggestion including a complete ban of the use of regulatory hosting. That may sound extreme, but emphasises just how significant the FCA perceives the risk of harm to be from such business models.

The Current Appointed Representative Regime

There are broadly 5 different types of Appointed Representative business models that have been identified.

  1. Introducer Appointed Representatives (IARs)
    The FCA proposals make it clear that many of the new recommendations will not apply to this group, which appear to be seen as low risk.
  2. Small Appointed Representatives
    Generally one man bands. This is the group that was primarily envisaged when the original legislation introduced.
  3. Sharing regulatory permissions within a corporate group
    Seen as more cost efficient for the group and can often easier for the regulator who is only required to deal with one entity.
  4. Larger Appointed Representatives using the regime to extend their business range
    Scenarios such as a retailer selling an insurance product related its core activities.
  5. Regulatory Hosting
    A use of the AR regime where, rather than carrying on any substantive element of a regulated activity itself, the regulated business of the authorised firm, i.e. the principal, involves making its permissions available for use by its ARs.

Benefits of the AR Regime

It’s clear that both the government and FCA believe that the AR regime remains a necessary and beneficial element of the UK’s regulatory system, albeit one that is in need of an overhaul. Both have highlighted very similar benefits that arise for financial services firms and consumers.

HM Treasury

  • Proportionate and cost-effective
  • Supporting effective competition
  • Driving innovation
  • Ensuring robust monitoring mechanisms


  • Cost effectiveness
  • Supports our engagement with firms
  • Supports effective competition
  • Innovation
  • Robust monitoring mechanisms

In short, HMT and the FCA feel the AR regime should and can benefit consumers. But they are not shying away from disruptive change if that is what is needed to protect those same consumers from harm.


It’s worth taking a look at the objectives of each organisation to help us understand what is being proposed. It is clear both HMT and the FCA see many benefits to the general principle of principal-led business. Their stated objectives are:

HM Treasury

  • Enable authorised firms to appoint representatives which can carry on regulated financial services activities for purposes which help to increase competition, foster innovation and enhance the consumer experience.
  • Provide a proportionate regulatory regime which ensures that authorised persons maintain effective systems and controls for overseeing the regulated activities which ARs undertake
  • Ensure that consumers of financial services provided through ARs are not disadvantaged or exposed to additional risk relative to consumers who deal directly with authorised firms


  • Increase consumer protection by providing additional clarity on principal’s responsibilities and our expectations of them.
  • Improve data collection will allow us to intervene early, reducing consumer harm.
  • Access for consumers across sectors to a wide variety of options for financial products and services. Our proposals support and help improve the options available to consumers.
  • Reduce level of misconduct and complaints across the market as a whole will enhance market integrity.
  • Effective competition driven by a wide variety of firms performing regulated activities.

What Are The Current Issues?

The regulatory regime around ARs is intended to provide a proportionate approach which ensures that principal firms maintain effective systems and controls for overseeing the regulated activities which their ARs undertake. It would seem that the FCA and HMT feel this is no longer working and change is required.

If we take a look at some of the key issues raised, we can see why action is being taken:

  • Resources
    One specific concern raised in the Consultation is that principals are not putting sufficient time and resource into ensuring their ARs are effectively overseen. The number of supervisory cases and complaints involving principal firms supports this conclusion.
  • Supervisory control
    Currently, the FCA have very limited supervisory control over Appointed Representatives. The FCA rely on their ability to enforce action against the principal and this is an area where we may see some legislative change to allow greater supervision of the AR themselves.
  • Consumer harm
    There is clear evidence that consumers of financial services provided through ARs are being disadvantaged and/or exposed to additional risk relative to consumers who deal directly with authorised firms and this is not acceptable to the FCA.
  • Regulatory hosting
    Whilst in general, both the FCA and HM Treasury seem to see the regulatory hosting model as the source of much concern, HM Treasury do also note some specific benefits where this is used. For example, as an incubator for technology driven business models. Whilst therefore, it is the case that the FCA is consulting, amongst other options, on banning the regulatory hosting business model, our expectation is that this is unlikely to happen. But those businesses that act in such a capacity are likely to see the most disruptive change to their regulatory burden and business models.

Proposed Changes

There are two main areas of potential change proposed by the FCA. These are:

  • Additional information will be required to be provided on ARs and notification requirements for principals.
  • Clarifying and strengthening the responsibilities and expectations of principals

Information and Notification Requirements

The additional information required will cover 4 key areas and will be subject to annual verification. The data covers:

    • the AR’s business
    • the AR’s revenue
    • complaints against the AR
    • the AR’s regulated and non-regulated activities

Each of these includes a comprehensive set of data and information, something that we encourage principals to consider when they look at the question of adequacy of their resources for overseeing ARs.
One driver for this is a desire from the FCA to use the data to update the Financial Services Register so consumers can easily and quickly check the types of regulated activities which ARs are and are not permitted to undertake.

Responsibilities and Expectations

    • Regulatory hosting: this will become a specific activity under the new proposals. The FCA see this is a higher risk business model and want to ensure they understand who is undertaking this type of business and how they are then monitored. Firms undertaking this type of work can expect to be subject to closer levels of scrutiny.
    • Reasonable steps: Currently, under SUP 12.6.6R, principals must take ‘reasonable steps’ to ensure that ARs act within the scope of their appointment. The FCA are proposing to add some guidance setting out what they expect ‘reasonable steps’ to be.
    • Sufficient resources: there will be a greater focus on ensuring principals have sufficient controls and resources to oversee ARs – the functions needed to ensure the principal can oversee the AR’s activities such as risk, audit and compliance functions, organisational structures (such as reporting lines) and reporting. It includes people, processes, technology, facilities and information needed to oversee the AR’s activities. This includes, for example, having appropriately trained staff and up-to-date IT systems.
    • Monitoring appointed representative growth: principals will be required to actively monitor AR growth to determine whether the resources, systems and controls the principal employs to monitor the AR’s activities and business remain appropriate.
    • Threshold Conditions and effective oversight of ARs: the FCA propose to introduce new guidance on expectations at SUP 12.4.4BG. This would clarify that principals should have systems and controls in place which enable them to effectively oversee financial services staff at ARs to a comparable standard as if they were individuals directly employed by the principal and the AR’s activities were in-house at the principal.
    • Effectively recognising, and limiting, the risk of harm: the FCA propose to require principals to ensure that an AR’s activities do not result in undue risk of harm to consumers or market integrity. SUP 12.4.4CG will be amended to include guidance on the considerations principals should have to identify an undue risk of harm.
    • Annual review of AR’s activities and business: a new rule is proposed requiring principals, on an annual basis, to review the fitness and propriety of senior management at the AR, its financial position, spans of control and the adequacy of the firm’s controls and resources.
    • Risk-based approach to review frequency: a requirement to carry out the annual review more frequently in certain circumstances.
    • Termination of AR contracts and winding down: new guidance will be provided on how and when principals should terminate or remediate a relationship with an AR.
    • Self-assessment: a new requirement to ensure principals are proactively assessing, monitoring and documenting their compliance with the policy.

Wider Issues For Consultation And Potential Change

The FCA have also highlighted a number of areas where they seek additional input before forming an opinion, but believe change is necessary. Typically, little normally changes between Consultation and Policy Statement, but the FCA has made it clear that, whilst it sees the risk of potential harm in these areas, it has not yet formed a view on whether or how it should implement change. If it does so though, these could have a profound and disruptive effect on businesses affected.

  • Regulatory hosting
    In the words of the FCA: “most issues arising from regulatory hosting arrangements are due to the principal applying too little resources to overseeing ARs, lack of skills and experience in the different markets in which the ARs operate and lack of appropriate systems and controls in place to enable principals to effectively oversee their ARs”. The issue is such that one outcome mused is the banning of such business models. Take note and act now if that is your business model. That might seem an extreme outcome, but the FCA will not have contemplated such an outcome if it was not serious.
  • Smaller principals with larger ARs and overseas ARs
    Concerns arise about the possibility for conflicts of interest where a small principal is overly reliant on a large AR to sustain its business model, or circumstances where UK principals oversee ARs with a head office outside the UK, seeking to circumvent the normal procedures for UK authorisation.

Legislative Changes

It’s worth noting the four key elements to the regulatory approach which, should the FCA conclude they need reform, would require changes to legislation. These are:

  • the overall scope of the section 39 exemption, including the regulated activities which ARs are permitted to carry on;
  • the regulatory tools available to the FCA, should it be concluded additional action is required to prevent abuse of the AR regime;
  • whether more direct regulatory requirements should be placed on ARs in order to strengthen incentives for regulatory compliance and high standards of conduct;
  • the role of the Financial Ombudsman Service in relation to ARs and their principals where consumers have experienced detriment whilst dealing with an AR.

With a legislative and regulatory element, this could be a somewhat longer process than typical FCA reviews. Both the FCA and HM Treasury have been clear that they will work together to introduce any necessary change.


The significant change in the use of the AR regime as a business model for insurance firms, compounded by the regulator’s data showing the increased risk of harm to consumers purchasing products from ARs can leave no doubt in anyone’s mind that ‘root and branch’ change is necessary and will happen. HM Treasury and the FCA have both issued a call for feedback, with firms given until 3rd March to submit their views.

And it is clear that we are likely to see not just an increased regulatory burden on the principal firm, but also possibly increased requirements on Appointed Representatives themselves. There is also clearly a threat to the entire business model of some firms, with the heavy scrutiny on the concept of regulatory hosting as a specific business model.

For those firms involved in regulatory hosting, or where business volumes or types of business sold through AR channels are significantly different to their own ‘direct’ business level or type, consider this perhaps as ‘shot across the bows’. The FCA have clearly set out their stall to look very carefully at firms with this type of business model. They have the data to back up their concerns and will act. Get your ship in order quickly. This is not the time to discover your own performance is lowering the averages.

Every firm will of course have a slightly different business model, and I would encourage any firm that acts as a principal or Appointed Representative to consider carefully the proposals to understand how they might affect your business. If you would like to discuss any aspect of your business model, please do contact myself or one of the team.


Craig Umbleja

Craig Umbleja

Senior Consultant

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Appointed Representatives – Managing the Regulatory Risks

Kenneth Underhill recently hosted a webinar on the Appointed Representatives regime. You can watch the recording here:

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