Appointed Representatives: what the FCA is looking for

Broking Business – March 2022

The FCA has published its consultation paper (CP21/34) on improving the Appointed Representatives (ARs) regime. It has identified an increased risk of harm to consumers and markets, as a result of the expansion and complexity of AR models in financial service markets. These include insurance distribution. What should you expect?

In 2021, the FCA recorded 40,000 ARs (including Introducer ARs) operating under roughly 3,600 principal firms in financial services markets. The general insurance and protection sector includes around 13,500 of these ARs, with just over half of all principals having a single AR.

The AR regime allows a firm or person to conduct defined regulated activities and act as an agent on behalf of an authorised firm (the ‘principal’). This means insurers and intermediaries can distribute products and services through their ARs. But, more recently, principals have increasingly used the regime in different ways. For example, they have established business models that rely solely on the appointment of a material AR that outsizes the principal firm. And they have developed broad distribution networks, with a large number of ARs operating on behalf of a principal and aligned to a common objective, market or product range.

Recent FCA and HM Treasury reviews and enforcement actions have highlighted that consumer harm often occurs where principals don’t conduct sufficient due diligence before appointing an AR. It can also result from inadequate oversight, monitoring or control once an AR is appointed.  PKF referred to the consequences of these weaknesses in our Lessons from Alsford Page and Gems’ article.

CP21/34 outlines the FCA’s key proposals to enhance the AR regime across relevant sectors. The initial proposals require principals to provide additional and more timely information on their ARs and how they are overseen. They would also need to provide clarity and increase the responsibilities of, and expectations from, principal firms engaging and overseeing the regulatory operations of ARs.

The consultation closes on 3 March 2022, with finalised guidance and requirements set to be released later this year.

Pros and cons of the existing regime

So the FCA is concerned that the current AR regime is not operating well in all cases. But it does acknowledge the potential benefits of the regime and its business models for all parties. These are:

• cost effectiveness – the regime provides a cost-effective way for both principals and ARs to comply with regulation
• FCA engagement – it supports an amplified distribution of key FCA messages, focus and requirements through the principal / AR relationships
• effective competition – it allows more participants in financial markets and different types of firms
• innovation – it encourages regulatory incubation to support firms by helping them understand the regulatory environment and demands before direct authorisation, in turn allowing the trialling of new services or propositions through established AR networks
• robust monitoring – the FCA notes that some principals provide high quality oversight and robust monitoring of ARs, ensuring good consumer and market outcomes.

The realisation and demonstration of these benefits depend on the effectiveness and robustness of the oversight, monitoring and controls at each principal. The FCA has found that these benefits can be eroded, and the risk of harm increased, if principals are unclear about their regulatory responsibilities for their ARs or if there is insufficient oversight and inadequate controls over the regulated activities undertaken by the ARs – for which the principal has accepted responsibility.

The FCA’s thematic reviews of the general insurance sector in 2016 noted a lack of clarity in roles and principal oversight. The regulator took steps to address issues at individual firms, including enforcement actions. It also produced a number of Dear CEO letters.

Working with the intermediary sector, PKF has observed these common pitfalls:

• Lack of understanding by principals of the AR relationship and the regulated activities they perform on their behalf
• Lack of clarity or incorrect categorisation of whether an AR is an introducer or a full AR
• Details of ARs on FCA register are not up to date. Failure to maintain internal registers of AR relationships and related information
• Poor record keeping for contracts with Ars
• AR contracts do not specify arrangements for handling client money
• AR monitoring relies on completion of annual monitoring questionnaires. These are too high level and lack questions on financial stability and competence
• AR monitoring questionnaires are not supplemented by any other independent checks by the principal – ie, they are too reliant on what the AR tells them.

Although there are examples of good oversight and proactive management and monitoring of ARs, many principals have not considered the management and oversight of ARs using established control frameworks or activities at the principal. There has been a tendency to rely on informal relationships between ARs and principals.

The FCA proposals

Considering the benefits and potential to cause harm with the existing AR regime, the FCA has proposed two main areas of policy change. These aim to improve consumer outcomes and align to its updated Consumer Duty, which is also under consultation:

• Additional information on ARs and notification requirements for principals. These would allow the FCA to identify potential risks linked to principals and ARs more easily, and provide a better understanding of the expertise, systems and controls the principals use to oversee their ARs effectively.
• Clarification and strengthening of principals’ responsibilities and the FCA’s expectations of them – with clearer existing rules and additional guidance to principals on how to oversee their ARs.

The FCA is also seeking the market’s views on the risks from regulatory hosting arrangements (where FCA principals support multiple ARs in conducting regulated activities as their prime operating model), and business models where ARs are large in size relative to the principal. It also asks for views on whether prudential standards should be strengthened to reflect the risk of harm posed to consumers and markets.

The following table summarises the FCA proposals, the intended outcomes and implications for firms, and the potential assurance needs.

Appointed Representative regime proposals​
Proposal	Outcomes	Assurance needs
Enhancements to monitoring, oversight and management of ARs
The FCA is proposing to clarify principals’ responsibilities for their ARs and to raise oversight expectations	Clear expectations, roles and responsibilities are set and communicated by the principal. Principals understand the risk profile across their AR model and undertake timely and effective monitoring to oversee the activities of ARs. Principals establish and maintain governance, risk and control frameworks that support the effective oversight of their ARs.	Confirm roles and responsibilities for ARs are clearly defined, documented, reviewed and agreed upon appointment, and reflect any changes to relationships as these occur. Principals carry out timely and effective risk assessments and maintain risk profiles for their AR estate. Review governance arrangements, risk frameworks, internal controls and adequacy of resources in overseeing and monitoring their ARs.
Principals to provide information on the AR’s business	Principals provide additional information to the FCA when an AR is appointed and on an ongoing basis. Proposed information includes: Primary reason for AR’s appointment Nature of regulated activities permitted by principal Non-regulated business of AR Whether AR provides services to retail clients Change of principal for AR Individual or group alignment of AR Employment relationships of individuals from AR Financial arrangements between AR and principal Expected revenue from regulated and non-regulated activities during first year.	Confirm templates, frameworks and processes exist to define and support AR appointment, including accurate and timely completion of FCA information / documentation requirements. Ensure information on ARs is available, accessible and up to date.
AR appointment / change notification reporting	Principals notify the FCA of a proposed AR appointment at least 60 days before the appointment takes effect. AR information change notification requirements exist (SUP12.7.7R). Under the new proposals, firms will be required to notify the FCA on any planned changes to an AR’s names or regulated activities at least 10 calendar days before the change takes effect. Extending the current requirement on FCA-authorised firms to check their information annually to cover the details of their ARs, including the activities permitted by the principal. Principals to be required to check the accuracy of their AR details within 60 business days of their accounting reference date.	Review the oversight and AR engagement programmes to ensure appropriate and time notification of changes. Review the reporting and verification processes aligned to annual and ad hoc submission of details to the FCA.
Enhancements to information collection and reporting on ARs
Complaints data	Extending the current requirement on complaints data to require principals to provide more granular complaints data attributed to individual ARs. Require the submission of complaints data on an annual basis using a new reporting form.	Assess complaints policies and practices to identify and record complaints data at individual ARs. Assess quality of guidance or training provided by principals to ARs on identifying and reporting complaints. Ensure alignment and consistency of complaints policies and procedures across multiple or varied ARs / products and services.
Revenue information	Proposal for principal firms to submit revenue data for each of their ARs – covering both regulated and non-regulated activities.  Propose that principal firms provide this data annually, within 30 days of their accounting reference date. A transitional period for existing ARs to allow principals to provide this information for the first full year of data following implementation of the rules.	Confirm governance, oversight and arrangements for engaging with ARs to obtain and record revenue data. Assess data quality and available MI to report in accordance with FCA requirements. Establish adequate processes and controls to ensure timely and accurate completion of documents and submission to FCA. Provide project or programmes assurance for implementation of any new reporting systems and adoption of FCA reporting requirements under transitional arrangements.

We expect some challenges for firms in implementing these proposals, particularly those to enhance complaints and revenue information currently provided by ARs. Principals are reliant on the systems and processes in situ at ARs to capture, encode and collate this information consistently, robustly and in a timely manner. It is likely the systems vary significantly between ARs, reflecting their size and maturity. This means inconsistent recording or categorisation of revenue types. Similarly, there may be operational and system challenges in categorising or analysing data that enables principals and ARs to agree accurate complaints information. The proposals may require greater levels of communication and interaction between principals and ARs, clearer roles and responsibilities, and more time commitment to achieve this.

The challenges ahead

The proposals remain under consultation until 3 March. But the concerns raised by the FCA echo those made through previous thematic reviews and Dear CEO letters, as well as PKF’s own observations. The emphasis on data collection and submission in the consultation paper is consistent with the FCA’s drive  to be a more data-focussed regulator. It also chimes with approaches outlined in other consultations launched through 2021 and 2022. We expect most of proposals to be finalised with no, or minor, changes in their wording. Firms will need to identify and assess the risks posed by their ARs and their approach to control, monitoring and oversight.

Completion of the consultation and subsequent finalisation of guidance may make some principals and ARs reconsider their business models and relationships in light of any increased regulatory burden. It may also encourage greater investment in systems and processes to collect and report on data at ARs.

PKF’s GRC team can provide independent assurance of governance and oversight frameworks, monitoring and reporting activities and control processes to help principals demonstrate effective and robust oversight of ARs.

For more information, please contact Jessica Wills.