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21 September 2016

Principal Firms Supervision Failures of Appointed Representatives

Following a thematic review, the FCA recently issued a Dear CEO letter to certain Principal Firms in relation to the supervision of Appointed Representatives.

Whilst the FCA’s thematic review looked specifically at the general insurance sector, the findings can be applied to all Principal firms that have Appointed Representatives.

Principal Firm Shortcomings

The FCA’s latest Thematic Review found there were widespread examples of poor practice and ‘significant shortcomings’ in Principal Firms, particularly with regards to the control and oversight of their Appointed Representatives.

The findings were significant enough to warrant the FCA following up the Thematic Review by issuing one of their rare Dear CEO letters to firms.

In particular, Principal Firms were reminded that they retain regulatory responsibility for the acts of their appointed representatives.

It should also be noted that, as a result of the review, action has been taken against a third of the firms that underwent detailed analysis, all of which have been banned from using new agents and two of which must also cease sales through their existing appointed representatives.

One observation from the review was that Principal firms could not consistently demonstrate that they had effective risk management, oversight and control frameworks to identify, monitor and mitigate the risks arising from their Appointed Representative’s activities.

As Jonathan Davidson, the FCA’s director of supervision for retail and authorisations said "While some principals did have a good understanding of their appointed representatives' activities and their obligations as principal firms, we found widespread examples of poor practices across the sector." He continued, "in many cases firms were simply failing to understand and manage the risks arising from their appointed representatives' activities."

Next steps for Principal Firms

Principal Firms with Appointed Representatives are encouraged to review the regulator’s report and to ensure that they are compliant with the regulator’s requirements such as contractual agreements, monitoring and suitability.

Principal Firms should now review their arrangements with their appointed representatives, including any arrangements previously in place, to ensure FCA standards have and are being met. Specifically firms should ensure that they have the right processes and procedures are in place when considering any new Appointed Representative arrangements.

In particular, Firms should consider if their Appointed Representatives are suitable and whether proper consideration has been given to any potential risks (nature, scale and complexity) to both their business and customers.

Furthermore, Firms should also consider whether they have an appropriate risk management framework in place, that there is appropriate and ongoing oversight and control and that contractual agreements properly reflect this.

If any deficiencies are identified, the Firms should also consider what steps might be needed to remediate, including any customer redress that may be appropriate.

Considerations for Principal Firms

Whilst there are many questions that Principal Firms should ask themselves, the following provides some initial considerations for Firms when reviewing their Appointed Representative arrangements:

• Have you reviewed the information you have about your Appointed Representatives? If any potential red flags are found, do you have the systems in place to highlight these to the Board in a timely manner?
• Have you considered if you have the right resources available to adequately identify, oversee, monitor and mitigate conduct risks originating from your Appointed Representatives?
• Have you considered if you have the right resources available to adequately address your regulatory requirements for your Appointed Representatives (e.g. Governance, oversight, controls, sufficient management information and monitoring activity)?
• Have you reviewed the contractual arrangements you have in place with your Appointed Representatives and ensured they comply with the relevant regulatory framework?
• What role does the Board play in setting the risk appetite, approach and risk management framework for your Appointed Representatives? Remember that decisions should be evidenced in Board Minutes and your firm’s strategic approach to the appointment of your Appointed Representatives clearly defined; and
• Have you taken stock of customer outcomes and if your Appointed Representatives are delivering consistently appropriate outcomes to your customers?

Compliance Support:

If you would like to discuss any aspect of having Appointed Representatives please call our experienced compliance consultants who would be happy to help. You may also be interested in reading out article on Appointed Representatives: Principal Firm Responsibilities.

Whilst the ultimate responsibility for compliance cannot be outsourced by a Principal Firm’s senior management, firms should remember that outsourcing parts of their compliance to third party services and compliance consultants can greatly assist them in the efficient running of their business and regulatory requirements.

Related Reading:

 Appointed Representatives: Principal Firm Responsibilities

Appointed Representatives Pitfalls: Principal Firms take note!