FCA publishes review of the oversight of appointed representatives

Following the FCA’s introduction of enhanced rules on the oversight of appointed representatives (ARs) on 8 December 2022, the FCA has recently published the findings of its review on how principals are adhering to these increased expectations. The review of 270 firms found that compliance with the AR regime requires improvement.

Despite 96% of principals expressing confidence in their effective implementation of the rules, the FCA identified significant gaps in oversight. Some principals were adopting a tick-box approach to compliance and relying on superficial measures such as website checks or self-declarations from their ARs, rather than ensuring thorough and effective supervision. Most principals had also not changed their onboarding or termination provisions, despite the need to consider these processes in the light of new rules, and to be able to evidence that they are robust and sufficient.

Further information on the FCA’s findings is as follows:

Self-Assessments

The FCA found that only slightly over half of the self-assessments which it reviewed were of a good quality, while just under one-fifth of principals had not conducted the self-assessment at all. The FCA set out examples of good practice, which include self-assessments that evaluate the firm’s oversight of ARs, the adequacy of its controls, and resources. Findings should be compiled into a single document with an action plan to address compliance gaps. These assessments must be conducted annually and should avoid a tick-box approach, ensuring all concerns are addressed.

Annual Reviews

The FCA found that less than half of the reviewed annual reviews were of a good quality, while 18% of principals had not conducted the annual review at all. Principals are expected to undertake an annual review of their ARs’ business models and activities, including any unregulated business. Similar to self-assessments, the included examples of good practice and areas for improvement make clear that annual reviews should avoid a tick-box approach and ensure comprehensive evidence-gathering to meet all regulatory requirements. Consumer Duty compliance should be embedded into the review, such as considering fair value assessments and staff training on the Duty.

Monitoring, Oversight, and Acting Out of Scope

The FCA found that only half of principals held regular meetings with their ARs, and fewer than a third reviewed consumer-facing materials or management information to ensure that they were operating within scope. Good practice includes monitoring proactively ARs’ monthly activities, conducting in-person visits, and comparing activity reports submitted by ARs with the principal’s own data. This includes filing calls with ARs and observing interactions between ARs and consumers.

Areas of improvement include not understanding the AR’s business model, and the AR agreement failing to state clearly the regulated activities that the AR is permitted to carry out.

Onboarding

The FCA found that only one-tenth of principals have revised their AR onboarding procedures to align with the new rules and now conduct more detailed checks. The FCA sets out that good behaviour includes documented procedures for onboarding to be kept up to date, with ongoing training provided. Principals should not solely rely on automated checks for background searches and should consider the impact of the AR’s appointment on their financial and non-financial resources.

Termination, Offboarding, and Orderly Wind-Down

The FCA found that only one-tenth of principals have revised their AR terminations procedures to align with the new rules, with some taking additional steps to ensure orderly wind-down. As set out in the examples of good practice, principals are expected to implement policies for the termination of AR agreements when the relationship is no longer beneficial. This helps avoid the “halo effect” of being listed on the Financial Services Register purely to promote risky unregulated activities. The AR’s website should be reviewed following termination to ensure it no longer states that the AR can undertake regulated activities on behalf of the firm.

Next steps

The FCA’s conclusions were similar to those of its recent review of monitoring under the Consumer Duty¹: some principals have made efforts to embed the new rules, but the FCA requires improved compliance with the AR regime. Jane Savidge, the Interim Head of Department for ARs, observes that some principals are failing to “get the basics right” by adopting a “bare minimum” approach.

It is therefore crucial that principals ensure they have assessed their existing processes in response to the new rules and have sufficiently documented any revisions. The FCA has followed up directly with firms in the review and will take swift action where it sees principals not meeting its standards in the future.

We discuss more about whether and when a principal can limit third party liability for its ARs in our article by Simon Williams below.

Footnotes

1. https://www.hfw.com/insights/insurance-bulletin-july-2024