This follows the Treasury’s policy statement, released in August, expressing concern about the “poor oversight” of ARs, potentially putting consumers at risk.
The consultation proposed requiring authorised firms that wish to use ARs to obtain permission from the Financial Conduct Authority (FCA) first. The Treasury said this would allow the FCA to make sure authorised firms have “appropriate expertise and resource” to oversee their ARs and ensure they act responsibly.
Authorised firms already using ARs will be able to continue without applying for new permission from the FCA.
It is also consulting on allowing consumers to take complaints to the Financial Ombudsman Service (FOS) if they cannot resolve a dispute with an AR, in instances where the authorised firm is not responsible for the issue.
The Treasury said most complaints to the FOS involving an AR were already handled by the dispute resolution service, and it would only be in the small number of cases where the authorised firm was not deemed responsible that the FOS would investigate the AR directly.
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Further, it has proposed aligning frameworks that apply to ARs with the ones that apply to authorised firms, so the FCA can reduce the administrative burden applying to ARs.
It said the proposals would support growth while promoting confidence in the use of ARs, allowing the government to maintain the scope of financial activities ARs can engage in.
A gap in the current AR framework
The government said it welcomed steps taken by the FCA following a review of the AR regime, but said a reform of the overall legislative framework was needed.
It said there was a gap in the current framework, as currently, any authorised firm could act as a principal and appoint ARs with no further permission or approval needed.
It said having oversight of ARs was an important activity and some principal firms were probably able to meet regulatory obligations as a directly authorised firm, but “ill-equipped or lack appropriate arrangements” to oversee another firm.
The government said the FCA should have a better ability to ensure a principal firm had the right expertise, systems and resources in place, as this would maintain high standards.
It said the FCA should be able to scrutinise prospective principals and having the ability to vary or withdraw permission to act as a principal should allow the regulator to act swiftly or stop activity that it harmful to consumers.
This would require amendments to the Financial Services and Markets Act (FSMA) 2000 to introduce a new permission regime for the activity of an authorised person acting as principal.
The Treasury said the current regime meant a principal was responsible for the activities of an AR when it came to complaints lodged with the FOS, but in a small number of cases this left consumers without access to the service to resolve disputes.
It said that where the FOS considers that a principal is not responsible for an AR’s actions, the FOS will be able to direct appropriate redress measures to the AR.
The FSMA 2000 would need to be amended to extend the scope of the FOS’ compulsory jurisdiction to ARs.
Lastly, the Treasury is proposing bringing ARs into the scope of the Senior Managers and Certification Regime (SM&CR), which sets standards for authorised firms.
The government said the scheme replaced the Approved Persons Regime, which also applied to ARs, while the new regime created an “inconsistent approach” for principals and ARs and “serves no useful purpose, sets different standards for similar or identical activities depending on the status of the firm performing them, and results in unnecessary administrative burdens for both firms and the FCA”.
It said there was “no justification” for the different and inconsistent frameworks and said it would be advantageous for principals and ARs to operate under the same conduct, fitness and propriety and accountability frameworks.
Under its proposals, the SM&CR general conduct rules would apply directly to ARs and give the FCA the ability to create a dedicated AR Senior Management Function (SMF) in principal firms.
The consultation will close on 9 April.
