Earlier this year, on 11 August, HM Treasury released a Policy Statement setting out the Government’s overall approach and targeted reforms of the Appointed Representatives (AR) legislative regime. The reforms carry important implications for principal firms, insurers and ARs alike.
Regulatory gateway for principals
A central change is the creation of a new “principal permission” that verifies whether a firm is suitable to act as a principal, embedding this regulatory gateway into the existing FCA authorisation process.
Positively, no existing principal firm will be required to repeat such a verification. The reform should also simplify the onboarding process for new ARs.
Vasco Vicini (from Khepri, a UK Regulatory Host) noted: “The extension of the FOS’s jurisdiction marks a meaningful shift in regulation: while the government is clear that these proposals do not water down the responsibilities of principal firms, Appointed Representatives will face increased accountability when conducting their businesses, particularly in circumstances where they venture into activities not explicitly accepted by their principal.”
The FCA notes that it has already taken measures to conduct greater analysis of notifications of new AR appointments with the aim of improving principal firm due diligence. By now conducting such analysis at the principal firm level, the regulator aims to address poor oversight in isolated cases while avoiding unnecessary burden on the majority.
Furthermore, the principal permission will consider the types of ARs any new principal firm has alongside having appropriate systems and controls in place, mitigating the likelihood of poor oversight going forward.
Impact on insurers
Insurer appetite for principal firms has been consistently limited over the past decade, as a small number of cases (for example, Basset & Gold Ltd) have cast a cloud of uncertainty over the sector. In particular, insurers remain cautious about claims brought against principal firms for the actions of their ARs.
Because Professional Indemnity and Directors’ & Officers’ Liability policies respond to allegations as well as proven wrongdoing, insurers can face defence costs even where a principal firm is ultimately not responsible. While a cautious stance is understandable, many good actors are being tarred by the failures of a few.
The introduction of this reform should provide comfort that firms with principal permission have the experience, systems and controls to oversee their selected ARs effectively.
Extension of FOS jurisdiction
The second key reform is extending the Financial Ombudsman Service’s jurisdiction to allow direct investigation into an AR where it can be established the principal firm has no responsibility over the activity conducted. Previously, in such cases, the Ombudsman could not pursue complaints.
On this change, Vasco Vicini noted: “Regarding the extension of the FOS’s jurisdiction, I believe they do mark a meaningful shift: while the government is clear that these proposals do not water down the responsibilities of principal firms, Appointed Representatives will face increased accountability as they operate in the market, particularly in circumstances where they may be edging into activities not explicitly accepted by their principal.”
With this extension, consumer protection will be enhanced by allowing complaints to be upheld directly against ARs where the principal firm bears no responsibility. From a liability perspective, this also reduces the likelihood of legal action against both principal firms and ARs by enabling matters to be resolved through the Ombudsman. Clearer segregation of responsibilities should also reassure insurers.
Implications for the market
BMS works with a significant number of principal firms and their ARs to add value to their insurance experience, using insights such as these reforms to negotiate with trusted, long-term insurance partners. As the AR regime evolves, BMS will continue to support firms in navigating the regulatory landscape and securing cover that reflects their strengthened systems and oversight.
If you have any queries, please do not hesitate to contact the BMS FINPRO team.