Principals and Appointed Representatives – two tier client protection?

Clients of an Appointed Representative (AR) could find themselves unprotected against losses if the advice given by the AR sits outside of the AR agreement with the Principal firm.

In July, the Court of Appeal sided with the Sense network, which had been taken to court by 95 claimants over an alleged secret £12.8m “Ponzi scheme” run by one of its ARs. The ruling confirmed the judgement in the initial Court case that found the network was not responsible for losses experienced by the claimants because the advice given by the appointed representative sat outside of its AR agreement.

This judgement is an ‘interesting’ interpretation of FCA rules and guidance and, potentially, has significant implications and risks for clients of appointed representatives.

Rules and guidance
One of a Principal’s “Supervisory” responsibilities is to:

“… be able to deliver the same level of protection to clients as if clients had dealt with the Principal itself” (SUP 12.1.3G)

The FCA Sourcebook also states:

“Responsibility for appointed representatives

SUP 12.3.1
… anything that an appointed representative has done or omitted to do as respects the business for which the firm has accepted responsibility will be treated as having been done or omitted to be done by the firm

SUP 12.3.2
The firm is responsible, to the same extent as if it had expressly permitted it, for anything the appointed representative does or omits to do, in carrying on the business for which the firm has accepted responsibility.

SUP 12.3.3
In determining whether the firm has committed any offence, however, the knowledge or intentions of an appointed representative are not attributable to the firm, unless in all the circumstances it is reasonable for them to be attributed to it.”

Despite these rules/guidance, the recent judgement sets a precedent that it is actually the private contract between a Principal firm and an AR that determines the business for which the Principal is responsible.  Therefore, any client of an AR advised in relation to anything which falls outside of the agreement with the Principal, may leave the client without protection, entirely without their knowledge.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

The Court ruling clearly has an impact for clients of appointed representatives. It also has potentially significant implications for firms and for agreements between Principals and ARs, and for disclosure documentation.

ATEB published an article on 24 May 2019 – Principals and Appointed Representatives – action needed.

Although the article was not specifically related to agreements, it did highlight the need for Principals to review the governance and supervision processes that relate to their ARs. 

Action Required By You

  • Principal firms should review any existing written contracts (agreements) between the Principal firm and its ARs to ensure that each party is clear on the limitations of the agreement;
  • Principal firms should ensure they have adequate systems and controls in place to effectively monitor the activities of the AR;
  • Read our previous article;
  • Contact your usual ATEB consultant for further advice or contact ATEB directly. 
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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