Principals and Appointed Representatives – action needed

Firms that have Appointed Representatives (AR) need to urgently review the adequacy their governance and supervision. That is the conclusion of recent FCA investigations that have resulted in a Dear CEO letter.

The review was initiated on the back of a similar review … with similar concerns … undertaken in 2016 on General Insurance firms with ARs. Details of the outcome of that review can be found here.

The FCA summarised the findings of the recent review on a broader range of Principal firms as follows:

“Our review identified significant shortcomings in principal firms’ understanding of their regulatory responsibilities for their ARs.

Most principal firms we reviewed had weak or under-developed governance arrangements in place, including a lack of effective risk frameworks, internal controls and resources. Though principals are responsible for the activities of their ARs, most principals were not assessing the risks these activities posed to their firms. Consequently, some principals may not be holding adequate financial resources for both liquidity and capital. Many principals did not identify conflicts of interest inherent in this business model or make attempts to manage them.

We conclude there is a significant risk of harm to consumers and to the market arising from the activities of ARs operating in this sector.”


Main concerns
The main concerns were centred on the following aspects:

AR on-boarding
When selecting ARs, many principals failed to fully assess their ability to oversee prospective ARs effectively.

Some principals misunderstood their ARs’ business models, raising concerns about the quality of due diligence done when they were being taken on.

At most principal firms, product governance arrangements were not in place, so firms could not demonstrate that products offered by ARs had been designed in the best interests of consumers.

Ongoing monitoring of ARs
Most principals had not put in place appropriate controls to monitor the activities of their ARs.

In many cases, monitoring was not bespoke to the business model of the AR.

Many principals were not taking adequate steps to ensure their ARs were complying with relevant regulatory requirements. There was little evidence, for example, of client file reviews, testing or challenge being undertaken by principals.

Some principals did not identify or record any conflicts on their conflicts of interest register despite the existence of some obvious conflicts.

A rapid growth in the numbers of ARs registered by some principals were not accompanied by comparable enhancements made to governance and risk frameworks to align with that growth.

No principal firm reviewed was regularly reviewing their ARs’ websites. Some of these sites contained non-compliant financial promotions, and some had inaccurate information about the AR’s regulatory status.

Capital and liquidity assessment
Principals are responsible for their ARs (including any liabilities that arise) so they should be considering what financial resources are appropriate to meet their obligations. Most principals were not doing so. As a result, principals may not be holding adequate financial resources. 

Many principals (subject to BIPRU and IFPRU) rely on Professional Indemnity Insurance (PII) to mitigate the risks arising from their ARs. The FCA stated, “Though insurance can form part of an appropriate risk mitigation approach, it is not a substitute for maintaining adequate financial resources in all circumstances. This is because a significant number of scenarios are not covered by PII policies (due to exclusions, limitations etc).”

Some principals were not following the requirements to include their ARs’ revenues when submitting their fee tariff data from which their annual FCA regulatory fees are calculated. This meant that they paid lower regulatory fees than they should have, with the balance covered by other fee-payers.


Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

The FCA expects principals to assess how they are meeting its requirements in relation to their ARs. Given the findings of this, and the previous, review, there is now an urgent imperative for Principal firms to ensure that they identify and address any shortcomings in their risk-management frameworks, processes and practices.

There is clearly a significant potential business risk to which Principal firms should give early and serious consideration.

ATEB is happy to work with principal firms in auditing these aspects.

Action Required By You

  • Principals need to ensure they read and understand the FCA findings and concerns and urgently review the governance and supervision processes that relate to their ARs;
  • For further guidance or to arrange an audit of your AR processes, contact your usual ATEB consultant or contact ATEB here.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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