We use cookies to make your experience of our website better. Some of these are set by third party Google Analytics to help us analyse website traffic. To comply with privacy regulations, we require your consent to set these cookies. If you continue to use the site without selecting an option we will assume you are happy for us to use cookies.

Principles For Principals – How Far Are You Responsible For Your Appointed Representatives?

Principles For Principals – How Far Are You Responsible For Your Appointed Representatives?

Charles Rogers

A recent final decision by the Financial Ombudsman Service highlights the risks faced by principals and their arrangements with appointed representatives (ARs).  A network was found to be liable for the actions of its AR, even though this involved fraudulent advice.  The terms of the appointed rep agreement were key to the decision and received close scrutiny by the Ombudsman.

What’s the deal?

The claimant, Mr J, complained about the misappropriation of his money by Well Read Financial Solutions and sought compensation for his loss.  Well Read was an AR of The Whitechurch Network Limited.  Well Read advised a client to sell investments and then to invest in a non-existent fund (the Well Read property portfolio).

The case revolved around whether, given that Well Read’s actions partly involved providing fraudulent advice, it had acted outside the scope of the appointed rep agreement.  TWN argued that – on the basis that the advice was outside the scope of the agreement – the actions of Well Read went beyond the activities for which it had accepted responsibility.

The Ombudsman disagreed, stating that:

“...the advice to invest in the Well Read property portfolio was not a regulated activity.  However that investment advice was ancillary to regulated activities that on my reading of the agreement between TWN and its appointed representative came within the scope of the business for which TWN has accepted responsibility.”

“I’m satisfied Mr J surrendered his existing investments because of the advice he received from TWN’s appointed representative.  I’ve not seen evidence to persuade me that he would have done so if it had not been for that advice.”

The Ombudsman’s view is that the advice to sell investments was within the scope of the agreement and thereby TWN’s responsibility, even though the subsequent fraudulent advice was not a regulated activity and so outside the scope of the agreement.

The network was ordered to compensate Mr J for investment advice dating back to 2006.

How should principals proceed?

Until recently there has been little formal guidance to sit alongside the rules for ARs.  In July this year the FCA did, however, publish a thematic review into principals and their ARs (TR16/6).  The review focused on the general insurance sector, but the FCA made it clear that its findings could apply to other areas of UK financial services and that it expects all principals to consider the report and to take appropriate action.

The FCA expects principals to be able to demonstrate that they consistently comply with their regulatory obligations to put in place compliant contractual arrangements with their ARs.

There are detailed requirements for appointed rep agreements which are set out across legislation, regulations and rules in the FCA Handbook.

Failing to meet the requirements for these deceptively straightforward agreements has several possible negative consequences:

  • FCA enforcement action against the principal – as a breach of the FCA rules;
  • ARs committing a statutory offence by breaching the general prohibition – ARs are not exempt from the need to be FCA authorised if their appointed rep agreement does not meet the strict requirements; and
  • commercial impact – agreements made through unauthorised persons (such as ARs acting without, or beyond the scope of, a compliant appointed rep agreement) are unenforceable against the client. 

As highlighted by the FOS decision against TWN, the terms of an appointed rep agreement are also pivotal in determining whether a principal is liable for the actions of its AR.

Our experience and expertise will allow you to navigate the pitfalls and help you abide by the principles for compliant AR arrangements.  Do get in touch if you would like us to review, health-check, craft or re-draft your appointed rep agreements.

Charles Rogers
Senior Solicitor, Financial Services Regulatory

Burness admin