Clifford Chance

In December 2022, the Financial Conduct Authority (FCA) implemented new rules to address significant concerns regarding the oversight of Appointed Representatives (ARs), that is firms or individuals that conduct regulated activities on behalf of an authorised principal firm. ARs in the general insurance (GI) sector typically engage in activities such as selling, advising on, or arranging insurance products.

The FCA has now published its findings on how principal firms are embedding the rules, as well as providing examples of good practice and areas for improvement. This stems from the FCA's commitment to developing its supervisory approach to ARs in its 2024/25 Business Plan, due to concerns over inadequate supervision leading to consumer harm. This article examines the review undertaken by the FCA, its key findings and the implications of the report for ARs and principal firms.

Key takeaways

Following on from the FCA's commitment to further supervise the AR regime in its 2024/2025 Business Plan, the regulator has taken significant steps to assess industry compliance. To gain a comprehensive understanding of how firms have implemented the new AR rules, the FCA has tested how approximately 270 firms (equivalent to 10% of the principal population) have embedded the new rules. As part of these tests, principal firms were asked about their oversight of ARs, how they ensure compliance with the rules, their onboarding and termination processes and whether tasks or functions were delegated to the ARs. In addition, 23 principal firms were selected for an in-depth assessment which involved the FCA reviewing information and documentation such as annual reviews and self-assessments.

The FCA's evaluation revealed that while principal firms have made efforts to comply with the new AR rules, their approaches have often been superficial or perfunctory. Rather than engaging in a comprehensive review that reflects best practices, many firms have adopted a "tick-box" mentality, focusing primarily on meeting the minimum requirements without delving into the underlying principles and objectives of the rules. The FCA highlighted the following key findings:

• 1 in 5 principals had not carried out the required self-assessment or annual review of their ARs and only half of the 4 in 5 principal firms that had completed a self-assessment were of good quality.
• Approximately half of the principals were not regularly reviewing their AR agreements.
• A third of principals were not using data or management information to monitor whether ARs were acting within the scope of AR agreements.
• Most firms had not changed their AR onboarding or termination procedures since the new rules were introduced.

One of the FCA's main concerns is the attitude of principal firms towards reviewing their own systems and procedures to allow for improvements and the identification of deficiencies. Instead of viewing such reviews as opportunities to identify deficiencies and implement improvements, some firms seem to adopt a more passive approach, potentially overlooking critical areas of risk. Another major concern is the level of scrutiny with which principals are reviewing their AR agreements to ensure ARs operate within their scope and their activities are adequately supervised. The lack of revised onboarding and termination procedures to improve AR standards was also highlighted as a concern for the regulator. These procedures play an important role in establishing clear expectations and managing the relationship between principal firms and their ARs.

Areas of focus

Self-assessment

As set out in SUP 12.6A, the purpose of self-assessment is to help principals ensure they are meeting the FCA's requirements and to identify where changes need to be made to achieve this. One of the key requirements is having a written record of compliance within the last 12 months. This requirement applies to all principal firms, including those with Introducer Appointed Representatives (IARs). While IARs have a more limited scope of activities, typically focusing on introducing clients to the principal firm or other ARs, they are still subject to regulatory oversight and must ensure their compliance with relevant rules.

The FCA's assessment revealed that while 83% of principal firms had completed their self-assessments, only 52% were deemed to be of good quality. This finding reinforced the FCA's concerns about the "tick-box" approach adopted by many firms. To enhance the quality of their self-assessments, the FCA identified that principal firms should focus on producing a more detailed written record which can be reviewed and approved by the principal's governing body, documenting action plans with a RAG rating to address material deficiencies and ensuring that templates meet the self-assessment requirements set out in SUP 12.6A.

Annual reviews

In addition to self-assessments, SUP 12.6A outlines specific requirements for annual reviews of ARs. While both self-assessments and annual reviews must be conducted at least every 12 months, annual reviews do not extend to Introducer Appointed Representatives (IARs). The focus of the annual review is to consider the fitness and propriety of an AR's senior management, its financial position and the adequacy of the principal's oversight controls and resources.

Similarly to self-assessments, 82% of principals were found to have completed their annual reviews, with only 43% being of good quality. Some could not show that an adequate annual review had taken place due to poor audit trails and insufficient record-keeping.

The FCA found that good practice included a strong understanding of the ARs' business model and having clear document trails adopting a holistic review of ARs' activities covering each of the points in SUP 12.6A. Consumer Duty should also be included within a firm's annual review to ensure fair value for consumers is being considered and staff have received appropriate training.

Monitoring, oversight and acting out of scope

As mentioned above, principals should have a written AR agreement which clearly outlines which activities the AR is permitted to carry out (SUP 12.5). In addition to having robust AR agreements, principals should also have controls over ARs' regulated activities for which they have accepted responsibility and adequate resources to monitor and enforce an AR's compliance with the FCA's requirements. This includes having adequate resources to monitor AR activities, enforce compliance, and assess whether existing oversight arrangements remain appropriate in light of changes in the AR's business.

Telephone questionnaires found two thirds of firms said they use data and management information to monitor ARs’ activities to ensure they are not acting outside of scope. Over half said they regularly reviewed their AR agreement and approximately 50% said they made regular visits to or held regular meetings with their ARs. Less than a third said they checked consumer-facing materials, such as websites, social media or leaflets.

Despite this, the FCA suggests a more proactive approach to monitoring, such as reviewing outward-facing marketing, conducting in-person visits and performing mystery shopping exercises to ensure ARs are not acting outside of their permissions. Following these suggestions will give the FCA comfort that principal firms are aware of the activities carried out by ARs and are well positioned to assess the adequacy of oversight.

Approach to onboarding ARs

When onboarding new ARs, principals must carry out adequate checks and due diligence on any prospective ARs including verifying financial stability and suitability.

While the FCA found that many firms had not changed their onboarding processes since the introduction of the new AR rules, it is important to note that this may be due to the lack of new ARs onboarded during this period. However, even firms that have not recently onboarded ARs should review their procedures to ensure they are comprehensive, up-to-date, and aligned with current regulatory expectations.

The FCA's findings indicated that some principals were simply relying on automated checks rather than applying human judgement or oversight. In response, the FCA reiterated the importance of maintaining clear, documented procedures for onboarding and providing ongoing training to ARs about the regulated activity they undertake.

Termination, offboarding and orderly wind-down

When deciding to terminate an AR relationship, principal firms should take all reasonable steps to ensure an orderly winding down of any relevant business, including pipeline business. Most respondents said they had not taken a new or different approach to terminating ARs since the rule change either because they had not terminated any ARs or because they were confident that their existing terminating process met the requirements of the new rules. Only a minority of 10% of telephone respondents said they adopted a new approach and are carrying out more frequent checks on their ARs during termination.

The FCA pointed out that good practice involves regularly reviewing the ARs' activities to ensure their websites are not misleading (i.e. where ARs have been terminated, association with the principal is removed) and where ARs have not conducted regulated activity for some time and there is no reason to retain permissions, that these agreements are terminated. These practices avoid consumer harm by ensuring that ARs no longer associated with regulated principal firms are removed from the Financial Services Register.

The detailed findings demonstrate FCA's observations of good practice and a desire for firms to adopt a mindset of understanding the purpose of the rule changes rather than it being a mere compliance exercise.

Concluding thoughts

The GI sector faces unique challenges when it comes to the oversight of ARs. Insurance products can be complex, and GI firms often heavily rely on ARs who can operate in a decentralised manner, making it difficult for principal firms to maintain a high level of oversight. Additionally, the GI sector has seen significant technological advancements in underwriting and risk assessment in recent years, which can introduce new risks and complexities into the AR relationship.

Given these challenges, reforms of the AR regime are driven by a clear objective: to improve outcomes for consumers. By strengthening the oversight of ARs and holding principal firms accountable, the FCA aims to ensure that consumers receive fair treatment, transparent information, and quality products and services. The FCA has also emphasised that it is not sufficient to draw up an AR agreement and forget about it. The main takeaway for GI firms is to ensure that as principals, they understand their ARs' business and can carry out comprehensive self-assessments and regular reviews to identify areas of compliance and deficiency in a clear and focused way. The rationale for this is if a firm has a good understanding of the ARs' business, they should be able to identify whether the AR is carrying out regulated activities within their permitted scope and whether the insurers maintain adequate powers and resources to independently oversee these activities. This should also lead to better results for consumers as principal firms will be better placed to provide redress to affected consumers.

Furthermore, GI firms should proactively document their systems and processes to adopt a holistic understanding of what their ARs do and whether their existing processes facilitate the identification of deficiencies and a clear action plan for improvement. The FCA gives the examples of setting up alerts to identify changes to ARs' websites which would indicate a change of business and having a standing agenda item to discuss ARs at board meetings – a simple and easy way to ensure ongoing monitoring. Ultimately, this mindset will transform firms' approach to the enhanced rules and ensure the FCA's aims are properly understood and achieved.