"Whether you're a directly authorised firm, a network, or an AR, the question of who pays when things go wrong – and whether they have the financial resources to actually do so – isn't going away. If anything, it's becoming more pressing."
Back in July 2023, the FCA wrote directly to principal firms with appointed representatives (ARs) and delivered a pretty clear message: you are responsible for holding compliant PII that covers the activities of your current and former ARs. It's not enough for the AR to hold its own cover. The obligation sits with the principal.
That letter wasn't subtle. The FCA had analysed its data and found that a number of principal firms either didn't have PII that covered their ARs' activities, or had policies with exclusions so broad they were effectively useless. The message was reinforced on the FCA's own website and has been a recurring theme ever since: if you're a network or a principal with ARs, your PI policy needs to cover what those ARs are doing or did in the past regardless of if they are no longer an AR or not.
What's changed: The Treasury Consultation
On 12th February 2026, HM Treasury published a formal consultation on reforms to the appointed representatives regime. It follows the policy statement issued on 11th August 2025 and a call for evidence dating back to December 2021. The consultation runs until 9th April 2026. There are two headline proposals.
First, a new 'principal permission' gateway. Authorised firms that want to appoint ARs will need specific FCA permission to do so. The idea is that the FCA can assess whether a firm actually has the expertise, resources and systems to oversee its ARs properly before it's allowed to take on that responsibility. Existing principals won't need to re-apply, but new entrants will face this gateway from the outset.
This makes sense. From an underwriting perspective, we've seen how the quality of principal oversight directly correlates with claims outcomes. Networks with robust supervision systems, regular file reviews, and clear escalation procedures simply perform better. A gateway that filters for operational capability should improve the whole market.
Second – and this is the big one – extending the Financial Ombudsman Service's jurisdiction to ARs. Currently, the FOS can only investigate authorised firms. If a consumer has a complaint about something an AR did, and that activity falls outside the scope of what the principal agreed to be responsible for, the FOS can't touch it. The consumer falls through the cracks. Under the new proposals, the FOS would be able to investigate the AR directly in those circumstances and, if it upholds the complaint, direct redress at the AR itself.
Wait – Doesn't this contradict the 2023 message?
At first glance, you might think so. In 2023 the FCA said principals can't dodge responsibility by pointing at the AR's own insurance. Now the Treasury is saying the FOS should be able to go after the AR directly. Are we shifting liability away from principals and onto ARs?
Not really. The crucial detail is in the wording: the FOS would only pursue the AR directly where the principal firm 'cannot be held responsible' for the AR's actions. This is specifically about situations where an AR has acted outside the scope of its appointment – doing things the principal never agreed to take responsibility for and perhaps didn't even know about.
For the vast majority of complaints – where the AR has been operating within the terms of its appointment – absolutely nothing changes. The principal remains on the hook. Its PII still needs to cover those activities. The 2023 message stands.
In fact, recent case law has been making it harder, not easier, for principals to argue they aren't responsible for what their ARs do. The 2024 Court of Appeal decision in KVB Consultants v Jacob Hopkins McKenzie found that a principal could be liable for its AR's conduct even where that conduct was expressly prohibited under the AR agreement. The court took the view that contractual restrictions on how an AR carries out its activities don't necessarily limit the scope of what the principal has accepted responsibility for under section 39 of FSMA. That's a significant widening of principal liability. However, it should be noted that the Supreme Court heard Kession Capital's appeal against this decision in July 2025, with judgment still awaited at the time of writing. The outcome could either confirm or narrow the Court of Appeal's interpretation, so this remains an area of some uncertainty for principals and their advisers.
So the window in which the FOS would actually pivot to investigating the AR directly – rather than the principal – may be genuinely narrow. But 'narrow' isn't 'never.' And that's where the problem starts.
The PII question nobody has answered
Here's the elephant in the room. If the FOS upholds a complaint against an AR and orders it to pay redress, what happens when the AR doesn't have the money?
Regulated firms are required under FCA rules to hold Professional Indemnity Insurance (or an equivalent guarantee) as a backstop to ensure that redress can actually be paid when it's due. That's a fundamental part of the consumer protection framework.
Appointed representatives are not subject to that requirement. They're not directly authorised. They don't have their own FCA permissions. And crucially, there is no regulatory obligation on them to hold PII.
Many AR firms are small operations. Without PI cover and without substantial capital reserves, a FOS award could be a paper victory for the consumer – they're told they're owed compensation, but there's nobody with the means to pay it.
Simon Harrington, head of public affairs at PIMFA (the trade association for wealth management and financial advice firms), put this sharply in a Citywire article when the proposals first emerged. He noted that the changes are positive for consumers who might otherwise be 'left in the lurch' where complaints fall outside the principal's responsibilities. But he went on to ask the question that matters most: "Regulated firms are required to have PI cover, or an equivalent guarantee, as a backstop to ensure redress can be paid. This is not the case for ARs. Where the AR does not have the requisite capital to address its compensation liabilities, what is the government's intended approach to remedy this?"
It's exactly the right question. And it's one the consultation doesn't obviously answer.
Now, it's worth being clear about what backstops do exist. The FSCS compensation rules (COMP 6 in the FCA Handbook) do include appointed representatives as 'relevant persons' against whom claims can be made – and the FSCS has stepped in for AR consumers in the past, albeit this is not an easy or automatic route as our understanding of previous cases is that a civil liability must be established in connection with a regulated activity which is not covered by the principal.
So, the real gap isn't that the FSCS can't cover AR consumers at all – in principle, it can. The gap is that there's no requirement for ARs to hold PII or adequate capital to meet FOS awards in the first instance. If the Treasury is extending FOS jurisdiction to ARs, the question of how those ARs are expected to fund redress needs a proper answer. Extending jurisdiction without addressing ability to pay is only half a solution.
What this means for principal firms
If you're a principal firm with ARs, it would be tempting to see these proposals and think: 'great, some of the liability is shifting to the ARs themselves.' Don't.
Your PII obligations haven't changed. You still need compliant cover for the activities of your current and former ARs where required by FCA rules. The FOS will still come to you first in the overwhelming majority of cases. And as the KVB Consultants case suggests, the courts are taking an increasingly broad view of what a principal has 'accepted responsibility' for.
This matters for renewal terms. Insurers underwrite based on the actual scope of responsibility, not the theoretical boundaries in appointment agreements. If case law is expanding what principals are liable for, that flows through to premium calculations and policy terms. Principals who understand this – who can demonstrate robust oversight and clear documentation of their AR relationships – will be better positioned than those who assume the reforms shift risk away from them.
The bigger picture
These AR reforms don't exist in isolation. They sit alongside the wider package of changes to the Financial Ombudsman Service announced as part of the Leeds Reforms on 15th July 2025 – including a proposed 10-year longstop on FOS complaints, an adapted 'fair and reasonable' test that gives more weight to FCA rule compliance, reformed case fee structures, and new mechanisms for the FOS to refer regulatory questions back to the FCA.
The whole redress landscape is shifting. And PII sits right at the heart of it. Whether you're a directly authorised firm, a network, or an AR, the question of who pays when things go wrong – and whether they have the financial resources to actually do so – isn't going away. If anything, it's becoming more pressing.
The Treasury consultation closes 9th April 2026. The industry needs to make clear: giving consumers the right to complain is meaningless if there's no realistic mechanism to ensure compensation can actually be paid. Jurisdiction without funding is a hollow promise.
