What do the government's AR proposals mean for advisers?

0:12Amy Austin: Hello and welcome to the FT Advisor podcast. I'm Amy Austin, News Editor at FT Advisor, and today I will be discussing the Treasury's latest proposals to shake up the appointed representative regime with David Mills, a financial advisor and founder and chairman of Pilot, and Simon Morris, a financial services partner with law firm CMS. So welcome to you both. Thank you for joining us today. The Treasury has published a consultation looking to make a number of changes to the AR regime to tighten it up. One of these includes bringing appointed representatives under the financial abandonment services remit for complaints.

0:54Amy Austin: So Simon, I thought we could start with you, maybe to explain to us, you know, what were the current rules for AR firms being referred to by the FOS? And then what are the Treasury kind of now suggesting happens?

1:08David Mills: Right. The first point I would make is that this new paper is the end of a long process, and I think on its own will not make very much difference. There is a back story. The back story is that appointed reps have mushroomed in recent years and have moved away from the traditional model of a financial advisor having some appointed reps or a mortgage broker or an insurance broker being an appointed rep. You still have a lot of those. And you've had a growth of what is called regulatory hosting under which a firm becomes a mini regulator and invites complete strangers in to meet appointed reps. And the concern is that appointed reps, probably of the latter kind mainly, have generated something like 60 % of claims on the compensation scheme, which are borne by ordinary IFAs as well as the rest of the industry.

2:06David Mills: And this has been tightened up over the last two or three years. Firstly, the FCA changed a lot of its rules to require firms to supervise their appointed rep much more carefully and to do annual reviews and so on. That, I think, is the greatest change. What we're looking at now is three points that could only be dealt with by legislation. That is why it's coming at the end. Yes, there is going to be a specific point on the ombudsman. As of today, if I was an IFA and my appointed rep made a mistake and was a breach of, for

2:44Amy Austin: example, the conduct of business rules, absolutely the complaints can be made straight against

2:49David Mills: the IFA. There will be a handful of cases when the IFA is not liable for his or her appointed rep. One example came before the courts quite recently. is where the appointed rep was committing an illegal fraud. And there's no question of the appointed rep being liable for that. It is a case like that that might now go before the ombudsman. There will be very, very few of them. It is really tidying up the loose ends. The bigger changes under the proposed legislation is going to be bringing appointed reps within the APA regime, in other words, the senior manager conduct regime. and that will be a good thing because it will make appointed reps focus rather more on their own responsibilities and also firms will need to apply for permission to take on appointed reps and that is maybe looking forward to the future but what has happened so far really is I think 80-90 % of the changes have already come about through the XGA rules and we're really looking get some points of detail here.

4:00Amy Austin: Sure yeah that makes sense. David do you think you know this kind of coming under the FOS you know what effect may it have you know do you think it will slow down like FOS decision times for example or do you think that it's just going to be kind of like business as usual it's just that the blame may be going somewhere else?

4:17Simon Morris: I think it's highly unlikely to have any material impact on FOS decision times mainly because the vast majority of the complaints will still go through the existing process that Simon alluded to. It will cover those minority of complaints where it falls outside the scope of the contract degree between the principal firm and the appointed representative. But as I say, it will be a minority of cases. In those particular cases, there might be some additional slowdown because they might have to have their own representation outside of the principal's representation, but it would be a minority of cases.

5:00Simon Morris: So principally, I don't see there being a slowdown to the process at all. It's not adding any bureaucracy. It's just providing more consumer protection.

5:09Amy Austin: Yes, which I guess is always a good thing, isn't it? You know, when people speak to advising that they need to know they're kind of protected. So Simon, you were saying, you know, probably one of the bigger ones is that, you know, principal firms are going to have to hold this FCA permission. What were your thoughts on this? Is this a good move for government to make?

5:32David Mills: Yes, I think it is definitely a good move. The United Kingdom is really unusual in allowing unregulated businesses to operate, such as appointed reps, so long as a regulated firm takes responsibility for them. That is a very unusual arrangement. And anything that makes sure that a handful of principal firms that do not take this seriously start taking it seriously is to be welcomed. We've already had detailed FCA rules brought in which would be achieved through the rule book requiring firms actually to do the job properly, actively to supervise, to have annual reviews, to report annually for their board to consider each year why they're satisfied they're supervising the appointed reps.

6:17These are important steps to take.

6:20David Mills: This is one final step in the same way that you now need a special FCA commission to approve the financial promotions of unauthorized people. Now, too, you're going to need a special FCA commission to be able to take on appointed reps. That will be mainly for looking forward to the future. And it means that you will need to satisfy the FCA that you are going to take that responsibility seriously. We've had the appointed rep regime running for almost 40 years now. It fundamentally works well. And it's very important for financial access. If an IFA can have appointed reps, then more people can get financial planning advice, retirement advice.

7:06David Mills: This is absolutely in accordance with government policy. but what is important is the handful of appointed reps that are not taking their responsibilities seriously should start taking it so I think this will be a welcome step.

7:19Amy Austin: And so David being an advisor yourself do you think that you know this extra permission is going to help and do you think you know the FCA are kind of there to be able to manage it because we do know that you know it does take a long time for firms to get permissions and authorizations etc i mean i absolutely agree

7:40Simon Morris: with simon it's a welcome um enhancement to the existing rules and as simon says the ar regime works well in the most and for the most part um the overall there is a as as the um permission needs to be applied for at the point of application it may it may reduce the time it takes for authorization. I appreciate that authorization times can be lengthy. However, the FCA have proposed that there'll be a grandfathering regime to allow for existing firms who have appointed representatives not to have to disrupt their existing processes, which is critically important because we don't want to be in a position where there's any disruption to the advice regime as it stands, particularly given the number of appointed representatives there are.

8:28Simon Morris: so yes it's a good thing it may delay authorization times by virtue of there being this additional oversight requirement and responsibility that is that is natural and I think the key thing is that we want to be in a position where we raise standards and we ensure that the minority of firms aren't maybe adhering to the rules as they should be the majority are typically fine but it needs to be proportionate so that we don't end up having huge amounts of additional regulation and the benefit isn't material to the end client. There is obviously the unintended consequence that by virtue of additional regulation, additional governance, that falls to the AR firms having to go through additional processes that may result in additional costs to the principal firms in pursuing this and therefore that may be passed down tangibly as a cost to the appointed representative and that may end up being passed down tangibly as a cost to the end client or it may also reduce it may also cause um time cost which again may get end up resulting in a cost to the end client and it may intangibly mean that some products or services are less flexible by virtue of the additional governance but for the most part a great uh addition for for sure but it just needs to be proportionate, make sure that we don't end up causing any unforeseen detriment to the end client.

9:53Amy Austin: Yeah. And Simon, with the final kind of proposal they've made about bringing the ARs under the senior managers regime, is this just like a tidying up job? Because obviously they're on a different thing at the moment.

10:07David Mills: Yes, it is. It is astonishing. 15 years ago, the old approved person regime was described in parliament as being discredited and ineffectual it is astonishing it has survived for nearly 15 years and inexplicable why it has survived 15 years to the point of direct it's almost legislative laziness it hasn't been dealt with and i think it is a good thing it is brought in one point i would make there is all of this depends on parliamentary time, everything, every financial services reform, the paper says depending upon parliamentary time, dot, dot, dot. It is possible, just possible, this won't happen for two or three years.

10:49David Mills: Conceivably, it might none of it ever happen. But as I say, if it doesn't for any reason happen, and I think it probably will, 80, 90 % of this has already been achieved at FCA rule book level. These are almost nice-to-haves rather than must-haves.

11:05Amy Austin: Yeah, which makes sense. David,

11:07Simon Morris: do you kind of feel the same yeah i mean and also consumer duty deals with a lot of this uh even even though it may not be strictly enforced and and permissions required this level consumer duty bleeds into this this oversight and governance responsibility for uh firms so it as a as simon has said the the majority of firms are doing their best to embed consumer duty in a positive way and that naturally will lead to better governance and that will naturally lead to ensuring that your ARs are performing as they should be performing and operating as they should be operating. So, yeah.

11:50Amy Austin: And Simon, do you think that then principals should be worried about these proposals or actually is it a really good thing for them that their ARs will now be, you know, everyone will have the appropriate oversight, you know, everyone will have the appropriate permissions and it will make sure that everything just really runs smoothly.

12:07David Mills: I think the only people who should be worried about this will be the lazy, sloppy principal who does not take their job seriously or who doesn't understand it and or the crooked appointed rep. We don't want either of those to remain in business. So I think the entire industry will and should welcome this.

12:27Amy Austin: Yes. And David, do you think that that's what advisors are actually going to think? oh yeah you know this is a long time coming this is just you know we'll now have an AR regime that operates smoothly.

12:39Simon Morris: I mean ultimately as Simon said it doesn't there's not really a major change to fundamentally how good governance would work within principal firms so as Simon said the good firms will continue to operate in the good way that they've operated and the firms that are not meeting requirements or expectations will either have to step up or exit the market they'll have their permissions removed um for instance so i don't think that um the i think i think it's pretty good most part as simon said this is a good thing and we want the good firms to remain in business i suppose the of the count the counter to that is that if the regulatory work is too onerous you could end up in a position where you end up when you end up with some firms deciding stop being ARs and then you consolidate into fewer firms and that potentially could have the unintended impact of reducing competition and increasing price but it's it will we'll see how the regulation goes it probably for the most part I don't foresee that I think that'll be a bit be fine and it will encourage those firms that aren't meeting their standards to improve

13:45Amy Austin: yes and Simon do you think that you know after these rules hopefully do come in um as you said whether that be several years or however long it takes do you think we will see ar start to drop off um because obviously at the moment ar numbers are quite high and they are growing you know where people it works well the regime in that you know you can set up a firm and your principal will look after your fees for you you know they'll they'll do the compliance for you do you think that it will stop and make people think about becoming an ar do you think it will be you know just business as usual, it's still the best way to go about things?

14:21David Mills: I think it'll be business as usual. We've got something like 12 ,000 mortgage ARs, 15 ,000 insurance ARs or something like that. I don't think there'll be any drop-off. One thing one hopes there'll be a drop-off is claims on the compensation scheme. The FCA basically got it down to about 300, 400 million a year. It was whizzing up towards a billion not that long ago by steps such as this and if the cost to businesses of claims on compensation schemes falls I think that is what is going to go down as a result of these proposals everyone will welcome that.

15:01Amy Austin: Yes and what about you David?

15:03Simon Morris: I think I think from a firm's perspective of wanting to become an AR or remaining an AR I mean ultimately the natural impact of this would likely be that there be additional governance requirements for the AR firm to undertake and there may be some contract work or or complaint handling procedures that need updating in light of procedures and and things like that might need tweaking so inevitably it will be there'll be more time demand on ar managers than there were was before i think um however that said the the alternative for instance of becoming directly authorized it is still going to be a big time saving and cost saving most in most cases for small firms to become an AR despite those increased uh requirement administrative requirements over BNDA probably uh but it's down to the individual processes in the firm and the the resources and governance ability they have

15:59Amy Austin: yeah and Simon to kind of wrap up you know we've obviously been talking about saying that the AR regime has been kind of working and as a is a good thing other than these proposals that you know they've kind of made. Is there anything else you would like to see happen to the AR regime to make it kind of work better? Or do you think that once this comes into place, we will have quite a robust system?

16:22David Mills: I think we have got a very robust system at the moment with the FCA rules that we've been brought in over the past two or three years. We've got the cake. This is the icing on the cake. With or without the icing, I think the system is fundamentally working well now. This will be a further improvement.

16:39Amy Austin: Yes. And what about you, David?

16:42Simon Morris: I completely agree with Simon. It's in every regard.

16:46Amy Austin: Let's hope it's not a couple of years until he comes in. Hopefully we might see this sooner than we think and we will have a perfect AR regime running through. But thank you both for joining me today. It's been interesting to have a chat with you.

17:00David Mills: Thank you very much.

17:02Amy Austin: And thank you all for tuning in and tune in next week where we'll discuss other goings on in the industry. Thank you.