Government plans to bring ARs into scope of FOS redress in regulatory overhaul

The government has proposed extending the powers of the Financial Ombudsman Service (FOS) to cover appointed representatives (ARs) as part of a series of planned reforms to the AR legislative framework.

Under the government's planned reforms, announced in a new consultation today, consumers will be able to take a complaint to FOS if they are unable to resolve a dispute involving an AR where an authorised firm is not responsible for the issue in dispute.

In addition, authorised firms wishing to use ARs would need to obtain permission from the FCA, enabling the regulator to ensure authorised firms have appropriate expertise and resource to effectively oversee their ARs and ensure they act responsibly.

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 34,000 ARs operating under around 2,400 authorised firms.

ARs could face direct claims from FOS

Currently, the FOS can consider complaints involving ARs only where the principal firm — the authorised firm responsible for overseeing the AR — is legally accountable for the AR’s actions under the Financial Services and Markets Act 2000 (FSMA). If an AR acts outside the scope of activities for which the principal has accepted responsibility, the FOS may be forced to rule that a complaint falls outside its jurisdiction. In such cases, consumers can be left without access to the Ombudsman.

Although these cases represent a small proportion of complaints, the government believes reform is necessary to close this gap. It proposes extending the FOS’s compulsory jurisdiction so that it can consider complaints relating to regulated activities carried out by ARs, regardless of whether the principal firm is legally responsible.

Under the proposed changes, the FOS will continue to investigate complaints through the principal firm where responsibility exists. However, where the principal is not legally responsible for the AR’s conduct, the FOS will be empowered to consider the complaint directly against the AR and, if appropriate, require the AR to provide redress.

The reform will require amendments to FSMA 2000 and updates to FOS rules. The government emphasises that this is a targeted, “last resort” measure designed to protect consumers without weakening the existing oversight duties of principal firms. 

The extension of FOS’s compulsory jurisdiction to an AR will only be triggered in the particular situation of a complaint relating to the acts of an AR for which the principal is not responsible. This means that the FOS will continue to deal with the vast majority of cases involving ARs by considering the complaint against the principal firm and directing any redress measures to that firm.

The changes will apply only to conduct occurring after a future implementation date, to be confirmed following legislative amendments.

New regulation for principals

The government is also proposing reforms to strengthen oversight by principal firms.

Under the current regime, any authorised firm can act as a principal and appoint ARs without needing specific approval from the FCA. The government proposes introducing a new FCA permission regime for firms wishing to act as principal. 

Similar to recent reforms requiring FCA approval for firms that approve financial promotions, authorised firms would need to obtain specific FCA permission before appointing ARs. The FCA would have powers to grant permission with conditions, vary or withdraw it, or refuse applications where necessary to advance its regulatory objectives. Authorised firms will be prohibited from acting as principal if they have not been granted permission by the FCA. 

To minimise disruption, existing principal firms would automatically be deemed to have the new permission, avoiding the need for immediate reapplication. However, the FCA would retain the power to vary or withdraw permission where necessary. In some cases, firms may initially be limited to appointing only introducer ARs unless they apply for broader permission.

By giving the FCA the ability to vary or withdraw permission to act as principal, it says the FCA would "be more effectively empowered to act swiftly and in a more targeted way to limit or stop AR activity which might pose a material risk to consumers".

Ash Daniells, legal director at Kennedys, commented: “Bringing appointed representatives into the scope of FOS investigations is a significant shift that recognises the crucial role ARs play in the financial sector. 

"The move strengthens accountability and reinforces the growing view that responsibility for consumer protection cannot sit solely at principal firm level. It closes a gap in accountability and reflects the reality that customer harm often arises at AR level, not just at principal firm level. 

"ARs will need to ensure they have appropriate insurance in place, given the potential that redress may now be directed to them.”

The latest proposals follow new FCA regulation introduced in 2022 which made authorised financial firms more responsible for their appointed representatives.