Appointed Representative Exceeds Its Permissions
Home & Wealth Solutions Ltd is an appointed representative (AR) of Principal Financial Ltd, a directly authorised firm. The AR agreement covers mortgages and general insurance. In January the AR's owner, Mr B, begins advising clients on transferring defined contribution pensions into a SIPP and arranging investments in a friend's property development bond, which pays the AR 3% commission. The principal's monitoring did not review this investment business because the AR's monthly reports listed only mortgage cases. In March a client complains that £95,000 was invested in the bond and the developer has stopped paying interest. The principal's compliance officer says the AR is a separate company, so the principal is not responsible. The client has asked the principal for redress and says she dealt with the AR because it displayed the principal's name on its website.
1. Was the AR permitted to carry on this business, and is the principal responsible?
Read the worked answer
Under s.39 FSMA, an appointed representative can carry on regulated activities only for which its principal has permission and which are covered by the AR agreement. Home & Wealth's agreement covers mortgages and general insurance. Advising on pension transfers and arranging investments are separate regulated activities, so the AR is not exempt for them. By carrying them on, it breaches the general prohibition in s.19 FSMA; that is a criminal offence, and the client agreements may be unenforceable under s.26 FSMA.
The principal is responsible for the AR's regulated activities within the scope of the agreement and must supervise the AR. The compliance officer's 'separate company' argument is too simplistic: for in-scope business the principal is liable; for out-of-scope business the AR is unauthorised, but the principal still has a regulatory duty to monitor the AR and ensure it does not exceed its permissions. The AR's website showing the principal's name may also create apparent authority and make the principal vulnerable to complaints. The principal should investigate urgently.
2. What immediate steps should the principal and the AR take?
Read the worked answer
The AR must stop the pension transfer and investment business immediately, withdraw the property bond promotion, and preserve all client files and records. The principal should notify the FCA under SUP 15.3, consider terminating the AR agreement, and review all AR monitoring and monthly reporting. The client's complaint should be handled under DISP; the principal should assess whether it has any liability and whether redress is due. If the AR was acting outside its scope, the client may have a claim against the AR, but the principal should not assume it is immune.
The firm should investigate Mr B, the friend's bond and the 3% commission; if there are signs of fraud, the MLRO should consider a SAR and the firm should report to Action Fraud. The principal should also review whether other ARs are exceeding scope and whether its training and monitoring are adequate. A senior manager should own the remediation.
3. What financial promotion and conflicts issues arise from the property bond?
Read the worked answer
The property development bond is likely to be a speculative illiquid security or a non-mainstream pooled investment, so its promotion to retail clients is restricted. The AR cannot communicate the promotion unless it is approved by an authorised firm and complies with COBS 4; the AR's lack of investment permission makes the promotion even more problematic. The 3% commission and the friendship with the developer create a clear conflict of interest. The AR must disclose the commission and manage the conflict, but disclosure alone may not be enough if the advice is not independent and the product is unsuitable.
The principal should check whether it approved the promotion or the product, and whether its own permissions cover it. The client's best interests (Principle 9) and the Consumer Duty require a suitable recommendation, clear risk warnings and fair value. The 3% commission may also breach the inducements rules if it is not designed to enhance the service to the client. The firm should review remuneration and conflicts across the AR.