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Appointed representatives – getting it right
16 September 2019
What does it mean and what needs to be done?
A little background
First there was the prohibition imposed by section 19 of the Financial Services and Markets Act 2000 prohibition (commonly referred to as the general prohibition) which states that no person may carry on a regulated activity in the UK, or purport to do so, unless:
a. Authorised
b. Exempt.
Then came Section 39 of the same Act which exempts appointed representatives [AR] from the need to obtain authorisation (Exempt). Becoming an AR therefore represents a viable option to individuals and businesses wishing to practice regulated activities in the UK without applying to the FCA for direct authorisation. Indeed, becoming an AR is an acceptable interim arrangement or can be permanent.
On the one hand this could be a good route for those not wishing to be overly burdened by the demands of Direct Authorisation, on the other it may represent a poisoned challis to principal’s (the directly regulated firm under which the AR will operate) that do not embed adequate processes and procedures to supervise the activities of their agents. Don’t forget, the principal will be ultimately responsible for the acts and omissions of its AR’s.
So, the advantages and disadvantages of Direct Authorisation v Appointed Representative status has been debated ad nauseum therefore I don’t intend regurgitating them here, but here’s the thing: It has been argued that the regulatory framework has often been embellished by [some] principals as a means to ensure universal deployment of systems and controls across ARs in order to maintain a level of control. But there’s a cost in the shape of freedom and autonomy. Like most arguments, this can be countered. A real example of this counter argument can be seen in the disciplinary action taken by the FCA against Financial Ltd wherein the FCA had major concerns about (inter alia):
- Suitability
- Competence
- Supervision
- Monitoring
- Risk Management.
All told, the FCA concluded that the firm’s systems and controls were inadequate the result being action against the firm and the firm’s [de facto] CEO personally.
The message is clear (like most things regulatory): get it right and the relationship of Principal and AR can be a very fruitful one. Get it wrong and the principal will be held accountable.
We recognise that there has to be a legitimate strategic reason for entering into a principal/AR relationship however there’s plenty of evidence out there to suggest that despite the well-publicised failings of Financial Ltd, such a relationship remains a concern to the regulator.
Indeed, their 2016 Thematic Review (TR16 / 6 – Principals and their Appointed Representatives in the General Insurance Sector) revealed three key shortcomings:
1. Risk management: Principals having little understanding of the nature and scale of the risks arising from the activities of ARs;
2. Governance and oversight: Including onboarding due diligence, controls, resources, capability and competence of ARs; and
3. Fair outcomes: The inability of principals to demonstrate that ARs were delivering fair outcomes.
What does this mean?
Despite the current Brexit distractions or Mr Andrew Bailey (CEO of the FCA) admitting to the Treasury Select Committee recently that the regulator is over-worked and under-resourced (we would not suggest that firms use the same explanation when talking to the FCA) there is likely to be more scrutiny of firms going forward to identify whether lessons have been learned and principals have taken heed.
The rules in SUP 12 (the FCA’s Supervision Sourcebook) are unambiguous yet there is a feeling that there has been widespread (across the GI space) tempering towards adherence to these rules. Principal firms should therefore expect to see the FCA take more of an interest in their AR arrangements going forward.
So, what needs to be done?
In simple terms, since ARs are ‘feeding off’ the permissions of principal’s and, because the FCA will hold principal’s responsible for the acts and omissions of their ARs, it is vital that firms adopt a robust onboarding and monitoring programme. RWA would, for example, expect firms to have considered the following:
- Individual identity
- Company identity
- Companies House checks
- Premises visit
- References
> Personal and/or
> Professional - Application form (if used)
- Financial
> 3 years accounts and/or
> Personal bank statements - DBS check1
- Credit check1
- Fit and proper checks
- Financial sanctions checks
- Applicants' Bribery Act procedures reviewed
- Competency assessments
- CPD checks
- Fit and proper declarations
- Ethical Standards declarations
- Form A (Short/Long)2
- Formal agreement
- File records reason for appointment
- File records remuneration rationale
- Have all internal business approvals been completed?
- Have all internal systems been updated (accounts/operations)?
- CONNECT submission to regulator
- Monitoring plan in place
- Introducers register updated
- Anticipated date/period of next review.
How bright does the AR light shine?
There is no doubt that we have witnessed an increase growth in the AR market since becoming an AR represents a perfectly feasible structure to undertake regulated activities in the UK without being directly authorised. Indeed, when the FCA conducted their thematic review in 2015/2016, the General Insurance sector had responsibility for over 20,000 ARs (source FCA).
Their review heavily criticised the sector for the manner in which principal’s supervise their ARs. In their thematic report dated July 2016 the FCA said:
Our work identified significant shortcomings in relation to principal firms’ understanding of their regulatory obligations for their appointed representatives and their control and oversight of their appointed representatives’ activities. Over half of the 15 principal firms in the sample could not consistently demonstrate that they had effective risk management and control frameworks to identify and manage the risks arising from their appointed representatives’ activities. We found examples of potential mis-selling and customer detriment as a result of appointed representatives’ actions at a third of the principal firms included in the review, with most of these issues not previously identified by the principal.
What followed was a ‘Dear CEO’ letter which set out the FCA’s expectations.
Conclusion
The concept of AR’s is not an immature one – indeed a colleague cut his regulatory teeth with a network of AR’s back in the early 90s – however there has been significant supervisory slippage in the interim which the FCA want to correct.
There’s no doubt therefore that the FCA have the Appointed Representative market firmly within their sights but like most things of a regulatory nature, get it right, and firms will have little to worry about. But get it wrong then…well enough said!
This document is provided for information purposes and is general and educational in nature. Nothing in this article constitutes legal advice. You are free to choose whether or not to use it and it should not be considered a substitute for seeking professional legal help in specific circumstances.
1 Remember the Senior Managers & Certification Regime (SM&CR) effective 9 December 2019;
2 For all Approved Person candidates if the AR provides Insurance Mediation activity as its main business activity otherwise only one individual if Insurance Mediation is secondary.