Key Insights from the FCA on Appointed Representatives

The Appointed Representatives (AR) regime serves to improve agility within financial services. It allows consumers to obtain the services they require without the need for the distributor to possess full FCA authorisation, and this, in turn, helps remove friction and allows innovation to proliferate the market more quickly.

This approach can facilitate easier market entry for firms (both principal and AR), but with the removal of friction also comes a greater encumbrance on the parties to manage potential risk to customers.

The FCA recently published an article detailing crucial updates regarding the supervision of ARs in the financial services industry. While they acknowledge some advancements in the regulatory environment, the changes centre on the significant improvements which are still necessary to effect compliance and safeguard consumers.

Key findings include:

• 20% of principal firms failed to conduct the obligatory self-assessment or annual review of their ARs
• About half of the principal firms were not frequently reviewing their agreements with ARs.
• One-third of principal firms were not utilising data or management information to monitor compliance with AR agreements
• The majority of firms had not revised their onboarding or termination procedures for ARs since the original rules were established

Essential considerations

Given these findings, we can expect ongoing focus on AR relationships and governance, and principal firms should consider several key components when evaluating the effectiveness of their approach to ARs.

If your firm is subject to regulatory engagement in this area, the FCA will expect you to have committed to (and be able to demonstrate) the factors below.

For ARs themselves, it’s vital that your relationship with the principal firm is conducive to demonstrating these elements have been considered. Therefore, ARs should not be surprised at the depth of information (both initial and ongoing) that principal firms require of them when entering into an agreement.

1. Due diligence

• Ensure you conduct thorough due diligence before onboarding an AR. This should include assessing the AR’s business model, financial stability, regulatory history, and overall reputation
• Do not allow yourself to be comfortable until you know that your AR sees your firm’s obligations as their own (with performance subsequently borne out though effective monitoring)

2. Effective outcomes monitoring & reporting

• The FCA expects firms to have a broad range of management information (MI) available, which allows the implementation of robust monitoring systems to track the performance and compliance of ARs
• Monitoring activities can include quality assurance checks on customer files, customer satisfaction surveys, in-person visits to ARs and mystery shopping exercises
• Effective MI can highlight performance aligned to quality, employee attrition, complaint rates, claim rates, revenue changes, and a wide variety of non-regulatory activity
• The MI which pertains to your AR’s performance will depend on a number of factors, and firms need to be able to assess inherent risk against risk appetite, ensuring alignment. They must subsequently translate this into proportionate and effective monitoring activities and effective reporting from their ARs

3. Communications

• With an effective monitoring and reporting framework in place, it becomes easier to maintain open lines of communication between the principal firm and ARs to review activities and concerns
• This can include regular meetings and updates utilising effective MI in easy-to-understand presentations and reports. This can lead to positive collaboration, enhancing outcomes and underpinning an effective monitoring and reporting framework

4. Good outcomes

• Prioritise consumer protection throughout the entire AR lifecycle by ensuring that ARs adhere to the FCA’s Consumer Duty principles, putting in place requirements for ARs to continually demonstrate this (again, this can come down to the specification of MI, however, it may be appropriate to undertake more in-depth analysis depending on inherent risk)
• Monitoring activity on outcomes could include carrying out annual reviews / audits, such as ‘considering fair value’ assessments or assessing and updating the training in place for employees of the AR

Forging closer partnerships benefits everyone

The FCA’s latest insight serves as a reminder that, while progress has been made, the journey towards comprehensive oversight of ARs is complex, multi-dimensional, and requires a continual commitment to regulatory compliance.

With this increased regulatory focus, there has never been a better time to review your AR relationships, ensuring alignment with FCA expectations and working towards establishing an industry-leading AR framework.

The AR regime helps deliver innovative products and services to consumers in line with market demand and, when managed well, customers, firms and ARs all get to experience the benefits.