FCA finds 'significant flaws' in appointed representatives of principal firms
The Financial Conduct Authority (FCA) has found significant failings in the control and oversight of appointed representatives by their principal firms in the general insurance market.
Appointed representatives carry out regulated tasks, shadowed by an authorised firm that acts as their principal. The principal firm has regulatory responsibility for the appointed representative and generally, in the regulatory context, ultimately, the principal firm is liable for anything the appointed representative has done or excluded itself to do.
The FCA’s main problem is the material risk of the damage done to the customer emerging from the activities of appointed representatives that are not subject to appropriate control and oversight from their principal.
According to the FCA some firms did not show that they understood the consequences of their obligations for making sure their appointed representatives followed regulatory requirements.
Over half of the 15 principal firms in its sample, could not consistently show that they had effective risk management and control frameworks to identify and manage the risks arising from the activities of their appointed representatives.
The FCA also discovered that almost half of the principal firms in the sample could not demonstrate that they had understood the nature, scale and complexity of the risks initiated from their appointed representatives’ activities and particularly the risk to customers.
It has also found examples of potential mis-selling and customer detriment because of appointed representatives’ actions at a third of the principal firms included in the review, with most of the issues not previously identified by the principals.
The disadvantaged customer outcomes found had included customers buying unnecessary products, products that may not be applicable for them to claim under or customers not being provided with enough information to make an informed decision.
At the appointed representatives of one principal firm, there was significant proof of mis-selling leading to actual customer detriment.
Jonathan Davidson, director of supervision, retail and authorisations at the FCA, 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.
“In many cases firms were simply failing to understand and manage the risks arising from their appointed representatives’ activities.
“General insurance is a large and important sector and we are concerned about the potential for customer detriment arising from the lack of oversight of appointed representatives. All principal firms need to consider these findings and look again at their practices.”
Matt Browne, insurance regulatory director at PwC UK, said: "Today's findings are likely to have come as a shock to some in the industry and, whilst many insurers and brokers take their responsibilities with appointed representatives very seriously, the FCA is keen to ensure the very highest standards are being upheld for customers.
"The FCA's heat is being directed at principles (insurers and brokers), underlining that the regulator expects them to take full responsibility for anything their appointed representatives do. Some firms may have to pay redress to customers, as evidence of customer detriment including products being mis-sold was found by the FCA's review.
"There were 15 firms involved in the FCA's review but the implications go much further - CEOs of all insurance providers and insurance brokers who deal with appointed representatives will be receiving a letter from the FCA telling them what to expect next - which is likely to include a 'top-down' review of their appointed representatives."
The FCA is also writing to chief executive officers of principal firms within the general insurance sector to stress its expectations and explain what actions firms should take to take the issues raised into account in the report.
