Key findings from the FCA’s thematic review on appointed representatives in the insurance sector 


SRC: Lexology & Berwin Leighton Paisner LLP


The FCA has published its (long-awaited) thematic review (TR16/6) titled ‘Principals and their appointed representatives in the general insurance sector’.

An appointed representative (AR) is able to carry out regulated activities without authorisation on the basis that they undertake such activity under the supervision of an authorised firm acting as their ‘principal’. A principal has regulatory responsibility for the AR and is responsible for any regulatory breaches committed by their ARs.

According the FCA, there are approximately 400 insurers and 5,100 intermediaries who are directly authorised and many of these firms have appointed and accepted responsibility for over 20,000 ARs.

Purpose and scope of the review

The purpose of the review was threefold:

  • to understand the impact of AR arrangements on customers;
  • to understand whether principals had assessed the risks associated with using ARs; and
  • to understand whether principals have put in place robust systems and controls to oversee their ARs effectively, particularly their sales activities.

The focus of the review was on general insurance products and services provided primarily to UK retail and SME customers.

The FCA’s sample for the review included 15 principals selected to represent a diverse range of business models, products distributed, sales methods and sizes of AR networks. These 15 principals had 783 ARs with 10,594 representatives operating at 1,684 locations.

Key findings

Almost half of the principals reviewed could not demonstrate that they had considered and understood the nature, scale and complexity of the risks arising from their ARs’ activities and, in particular, the risks these activities presented to customers. This resulted in some ARs conducting activities outside their principal’s core areas of expertise, where the principal lacked the ability or resources to oversee them effectively.

Over half of the 15 principals included within the sample could not consistently demonstrate that they had effective risk management, oversight and control frameworks to identify, monitor and mitigate the risks arising from their ARs’ activities. Some of these principal firms did not appear to have understood the full extent of their obligations for ensuring that their ARs complied with relevant regulatory requirements, particularly in relation to their sales activities.

Many of the principals did not have adequate systems and controls to ensure ARs complied with the relevant regulatory requirements (including the requirements of PRIN and ICOBS).

In a third of the principal firms, the FCA found examples of potential mis-selling and customer detriment as a result of ARs’ actions, with most of these issues not previously identified by the principal. This included customers buying products that they may not need, under which they may be ineligible to make a claim, or without being provided with enough information (including key exclusions) to make an informed choice. The FCA also identified potential customer detriment arising from shortcomings in some principals’ understanding and application of the client money rules.

In five firms, the FCA identified material risks to customers arising from their poor practices, which left the FCA with no alternative but to take early supervisory intervention actions to protect the interests of customers. These actions included agreeing the imposition of requirements on the regulatory permissions, asking principal firms to cease sales activities and commissioning two FSMA section 166 skilled persons reports to assess whether detriment has been suffered by customers from mis-selling and consider the adequacy of systems and controls. The FCA are also considering whether there is a need for customer redress.

Legal perspective

Thematic reviews are a strong indicator of the FCA’s current supervisory and enforcement priorities, and provide useful guidance on the standards that it expects.

Many of the issues raised in this review mirror failings (in respect of oversight of ARs) which were a focus of the FCA’s recent enforcement action in the solicitors’ PII market. The aggressive actions taken by the FCA as a result of failings identified during the review are a further example of the FCA pursuing its ‘early intervention’ strategy.

In order to fulfil their regulatory obligations as principals, insurers and intermediaries (as well as principals operating in other sectors) need to have robust systems and controls in place to ensure they have adequate oversight of AR arrangements, with a clear focus on ensuring that good consumer outcomes are achieved. In practice, this is likely to include:

carrying out a detailed risk assessment (to evidence that it has considered and understood the nature, scale and complexity of the risks arising from ARs’ activities);

  • carrying out detailed pre-appointment due diligence on the AR;
  • receiving and analysing adequate management information;
  • carrying out regular audits to ensure that the AR is meeting its obligations; and
  • taking a robust and proactive approach to managing the relationship.

In terms of next steps, the FCA has said that it will be sending a ‘Dear CEO’ letter to the chief executive officers of principal firms with ARs in the sector setting out its expectations. We would advise these firms to consider the FCA’s findings carefully and to review their AR arrangements in light of them.

Remember: Compliance Consultant is a specialist compliance consultancy and can assist you in reviewing your arrangements under any of the FCA business standards or SYSC.

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Source: Berwin Leighton Paisner LLP United Kingdom July 29 2016

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