Principal/AR Relationships, the 2022 Reforms, and the Tightened Regulatory Framework

The Appointed Representative (AR) regime is a feature of the UK financial services regulatory framework that allows firms to carry on regulated activities without their own FCA authorisation — instead operating under the authorisation of a “principal” firm that takes regulatory responsibility for the AR’s regulated activities. The regime has been part of UK financial services since the FSMA 2000 framework was established, but underwent substantial reform in 2022 (PS22/11 and PS23/4) following FCA concerns about AR-related customer harm and the operational standards of the regime in practice. The post-reform regime imposes substantially higher obligations on principal firms to oversee their ARs — and has materially changed the recruitment and operational dynamics of AR-based business models.

This guide explains how the AR regime actually works in practice — the legal framework under section 39 of FSMA, the principal/AR relationship and the obligations on each side, the substantive 2022-2023 reforms, and the operational reality post-reform. It also covers the recruitment dimension — the senior team that principal firms now need to oversee ARs effectively, and the implications for firms considering AR-based business models.

What’s missing from most online explanations is the practical impact of the recent reforms. The regime is well-documented in the FCA Handbook; what’s harder to find is what good principal firm AR oversight looks like post-reform, and where firms have run into difficulty as the framework has tightened. That’s the gap this guide fills.

What an Appointed Representative Is

Section 39 of FSMA establishes the AR framework. Under section 39:

An AR is a person (individual or firm) who carries on regulated activities under a written contract with an authorised firm (the “principal”)
The principal accepts regulatory responsibility for the AR’s regulated activities to the extent of the contract
The AR can carry on the contracted regulated activities without its own FCA authorisation
The principal must register the AR with the FCA on the public register

The regime exists to allow specific types of business model:

Self-employed financial advisers operating under a network principal
Insurance distribution by retail brokers under product manufacturers’ authorisation
Specialist business lines operating under broader firm authorisation
Sub-distribution arrangements in payments and other sectors
Introducer ARs who refer customers to authorised firms

The Pre-Reform Regime — How It Operated Until 2022

Before the 2022 reforms, the AR regime had operated with relatively limited principal firm oversight obligations. Principal firms were responsible for their ARs’ regulated activities but the substantive oversight standard varied significantly across the regulated population. The FCA’s 2021 review identified several systemic concerns:

Principal firms generating substantial complaint and redress activity from AR-related conduct
ARs operating with inadequate principal firm oversight, including outside the contracted regulated activities
Customer harm patterns concentrated in specific AR-based business models
Principal firms with high AR-to-staff ratios indicating limited substantive oversight capacity
Specific concerns in the financial advice network sector and certain insurance distribution models

The FCA’s response was substantial regulatory reform through PS22/11 (December 2022) and PS23/4 (subsequent updates), with the new framework taking effect in late 2022 and through 2023.

The PS22/11 Reforms — What Changed

The 2022 reforms substantially elevated the principal firm’s obligations toward AR oversight. Key changes include:

Enhanced AR onboarding

Principal firms must conduct substantive due diligence before onboarding new ARs, including:

Detailed assessment of the AR’s proposed business model
Fit and proper assessment of the AR’s senior management
Financial assessment of the AR’s resources and viability
Risk assessment of the AR’s customer-facing activity
Documented decision on AR appointment with substantive analysis

Annual AR review

Principal firms must conduct annual reviews of each AR, examining:

The AR’s continued suitability
Compliance with the principal/AR contract
Customer outcomes from AR-led activity
Complaint patterns and resolution
Any conduct concerns identified through monitoring

Self-assessment and improvement plans

Principal firms must produce an annual self-assessment of their AR oversight framework, identifying any concerns and setting out improvement plans. The self-assessment is signed off at SMF level.

Enhanced reporting to the FCA

Principal firms must provide the FCA with substantially more information about their AR populations, including:

Annual AR-level data including complaint rates, financial performance, and key metrics
Notification of significant AR events (departures, material complaints, conduct issues)
Specific reporting under the s39A regime for ARs in key areas

Specific limitations and conditions

The FCA can impose specific limitations or conditions on principal firms — including caps on AR numbers, restrictions on AR types, or specific oversight requirements.

Compensation considerations

Principal firms remain liable for redress arising from AR conduct, with the post-reform expectations more substantively monitored.

The “AR Per Compliance Officer” Test

One of the practical tests the FCA has applied post-reform is the ratio of ARs to compliance staff at the principal firm. Principal firms with very high AR populations relative to compliance team capacity have been substantively challenged. The FCA’s view is that effective AR oversight requires substantial compliance capacity — and that principal firms operating with hundreds of ARs and minimal compliance team are not realistically delivering the oversight the regime requires. Several large principal networks have substantially reduced their AR populations or significantly increased compliance investment as a direct consequence.

The Principal/AR Relationship — Substantive Obligations

The principal firm’s obligations

The principal firm:

Carries regulatory responsibility for the AR’s regulated activities under the contract
Must register the AR on the FCA’s public register
Must conduct substantive due diligence before AR onboarding (post-reform)
Must conduct annual reviews of each AR (post-reform)
Must oversee the AR’s regulated activity — including monitoring, training, and intervention where needed
Bears liability for redress arising from AR conduct
Must report to the FCA on AR matters (enhanced post-reform)
Must produce annual self-assessment of AR oversight framework
Must have appropriate senior management oversight of AR operations

The AR’s obligations

The AR:

Operates under the principal’s authorisation for the contracted regulated activities
Must comply with the principal/AR contract
Must operate within the regulated activities authorised by the contract
Cannot carry on regulated activities outside the contracted scope
Is subject to the principal’s monitoring and oversight
Must comply with relevant FCA rules applying to the regulated activities
Must satisfy the principal’s fit and proper expectations on an ongoing basis

The customer’s position

From the customer’s perspective:

The customer’s contractual relationship may be with either the principal or the AR depending on the specific business model
Customer complaints can be made to the principal, the AR, or the Financial Ombudsman Service
FOS jurisdiction extends to the AR’s regulated activity
FSCS protection applies to AR-mediated activities where applicable
Customer redress is ultimately the principal’s responsibility

Types of AR Arrangement

AR arrangements vary substantially in structure. Common patterns include:

Self-employed adviser networks

Principal firms operating networks of self-employed financial advisers who provide advice under the principal’s authorisation. Common in mortgage broking, financial advice, and insurance distribution.

Insurance distribution arrangements

Insurance product manufacturers operating distribution networks of brokers and intermediaries as ARs.

Sub-distribution in payments

Payments and e-money firms operating distribution networks of agents and sub-distributors. Note that some payments-sector arrangements operate under the separate “agent” regime under PSR rather than the AR regime.

Introducer ARs

ARs whose role is limited to introducing customers to the principal firm, with the principal handling the substantive regulated activity.

Specialist business line ARs

ARs operating specific business lines under broader firm authorisation — for example, specialist mortgage advisers operating under a broader broker’s authorisation.

Becoming an AR — The Onboarding Process

Post-reform, the AR onboarding process is substantively more demanding. Typical principal firm onboarding includes:

Pre-application discussion

Initial discussion between the prospective AR and principal to assess fit, proposed business model, and high-level suitability.

Application and due diligence

Formal application by the prospective AR, with the principal conducting substantive due diligence including:

Business model assessment
Senior management Fit & Proper assessment (see our Fit & Proper Test Guide)
Financial position review
References from previous regulated employment or principal arrangements
Background checks
Risk assessment of proposed customer-facing activity

Contract negotiation

The principal/AR contract is negotiated and agreed. The contract specifies the regulated activities authorised, the operational arrangements, the financial terms, and the oversight framework.

FCA registration

The principal registers the AR on the FCA’s public register, with appropriate detail about the AR and the activities authorised.

Onboarding and training

The AR undergoes onboarding training on the principal’s framework, systems, processes, and the regulatory expectations applying to the activities.

Go-live

The AR begins operating under the principal’s authorisation, subject to ongoing monitoring and the periodic review framework.

Sector-Specific AR Considerations

Financial advice and mortgage broking networks

This sector has been the most heavily impacted by the 2022 reforms. Several large advice networks have substantially restructured their AR arrangements, reduced AR populations, or merged operations to achieve appropriate compliance capacity. The post-reform AR-per-compliance-officer expectations are particularly relevant in this sector.

Insurance distribution

Insurance manufacturers operating broker AR networks face the same substantive reforms. The interaction with the IDD framework adds additional considerations.

Investment firms

Investment firms operating AR arrangements need to consider the MIFIDPRU prudential framework alongside the AR oversight obligations. Network capital adequacy can be affected by AR arrangements.

Payments and e-money firms

The PSR and EMR include separate “agent” provisions distinct from the AR regime. Some payments arrangements operate under the agent framework rather than the AR framework — with different but related obligations.

Cryptoasset firms

Cryptoasset firms generally cannot use the AR regime to bypass the registration requirements under MLR 2017, which apply to the underlying activity rather than to the firm structure.

Recruitment Implications for Principal Firms

The 2022 reforms have substantially changed the senior team requirements for principal firms operating AR arrangements:

Enhanced compliance team

The substantively higher AR oversight obligations require materially larger compliance teams. Principal firms operating significant AR populations now typically need:

Dedicated AR oversight team — distinct from broader compliance monitoring
Senior AR oversight role — frequently a Head of AR or equivalent
Specialist AR onboarding and review staff
AR-specific training delivery capability
AR-specific complaints handling and customer outcomes monitoring

SMF responsibilities

The principal firm’s SMF16 (Compliance Oversight) typically owns the AR framework — see our SMF16 Guide. For principal firms with substantial AR populations, the framework can be operationally demanding.

Senior management capacity

Principal firms need senior management capacity to engage substantively with AR matters — including annual self-assessment, FCA dialogue on AR oversight, and material AR events.

Technology investment

Effective AR oversight at scale requires substantial technology capability — AR management systems, transaction monitoring across the network, customer outcome MI, complaints management, and similar.

For Firms Considering Becoming an AR

For firms considering operating as an AR rather than seeking direct authorisation, the post-reform considerations include:

Principal firm selection

The principal firm selection is materially more important post-reform. Principal firms with strong oversight frameworks, appropriate compliance capacity, and established customer outcomes track record are preferable to weaker principals.

Operating constraints

The AR operates within the regulated activities authorised by the contract — typically narrower than direct authorisation would provide. Business model evolution may require contract amendments or moving to direct authorisation.

Cost considerations

The AR pays the principal a percentage of revenue or fixed fees for the principal’s services and authorisation cover. Costs vary materially by sector and principal arrangement.

Exit considerations

Moving from AR status to direct FCA authorisation is itself a substantial process — see our How to Become FCA Authorised Guide. Firms should consider the long-term trajectory when entering AR arrangements.

Customer relationship

The customer’s relationship may be primarily with the AR or the principal depending on the specific arrangement — affecting branding, customer experience, and complaint handling.

Common AR Regime Pitfalls

Inadequate principal firm oversight capacity. Principal firms with high AR-to-compliance-staff ratios face FCA scrutiny.

AR onboarding without substantive due diligence. Generic onboarding processes that don’t assess specific AR risks fail the post-reform standard.

Annual AR reviews that are administrative. Reviews that confirm continued operation without substantive analysis fail the framework.

ARs operating outside contracted scope. Where ARs carry on activities outside the principal/AR contract, both face exposure.

Inadequate complaint and customer outcome monitoring. Principal firms not substantively monitoring customer outcomes from AR activity.

Senior management not engaged with AR oversight. Where the principal firm’s senior management treats AR oversight as operational delegation, the framework’s governance dimension fails.

AR networks too large for the principal firm to oversee effectively. Network size disproportionate to principal capacity is a recurring concern.

Settlement and dispute handling weakness. Where AR-related complaints and redress are handled inadequately, principal firm liability and reputation are affected.

A Note from Our Founder — Adrian Lawrence FCA

The Appointed Representative regime has been one of the more substantively reformed parts of UK financial services regulation in recent years. The 2022 reforms fundamentally elevated principal firm obligations, and the operational and recruitment implications continue to play out across the population of AR-based business models. Principal firms that have invested in substantive AR oversight capacity — including senior compliance leadership specifically for AR matters — typically run their FCA dialogue on AR oversight from a position of strength. Principal firms operating with pre-reform oversight capacity for post-reform AR populations frequently face supervisory pressure.

The recruitment angle that comes up most often in our placements is the senior compliance leadership for principal firms with substantial AR populations. The Head of AR Oversight, AR-specific Compliance Officer, and similar roles have grown substantially since the reforms. Principal firms recruiting senior compliance leadership in this context need candidates with specific AR oversight experience — and the candidate pool with that experience is genuinely tight given the recent emergence of these roles.

For firms considering becoming ARs rather than seeking direct authorisation, the calculus has changed materially. The cost differential between AR and direct authorisation has narrowed in some sectors as principal firms have increased their fees to fund the enhanced oversight obligations. Combined with the operational constraints inherent in AR arrangements, direct authorisation has become more attractive for some firms that would previously have chosen AR status.

At FD Capital we work on senior compliance and AR oversight recruitment for principal firms regularly. If you are operating an AR-based business model and considering senior compliance recruitment, I’m happy to have a direct conversation.

Speak to Adrian about AR oversight recruitment →

Adrian Lawrence FCA | Founder, FD Capital | ICAEW Verified Fellow | ICAEW-Registered Practice | Companies House no. 13329383

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The Appointed Representative Regime: A Complete UK Guide