We have considered the FCA's thematic review and the Dear CEO letter and set out a list of our thoughts and some practical steps that you should be considering.

Our thoughts

  • The Dear CEO letter shows how seriously the FCA is taking this issue. It has already commissioned two section 166 FSMA skilled persons reports to assess whether detriment has been suffered by customers from mis-selling and to consider the adequacy of systems and controls. There is a clear risk to getting this wrong. The AR regime should not be seen as a quick fix to selling insurance where proposed distribution partners are not authorised under FSMA. A principal is taking full regulatory responsibility for the activities of its AR.

  • The regulatory requirements for AR agreements are prescriptive as set out in (amongst others) section 39 FSMA, the Appointed Representatives Regulations 2001 and SUP 12 of the FCA Handbook. Yet we still come across a number of AR agreements which do not meet these requirements and, in particular, which do not adequately address client money issues or clearly reference the scope of the AR's appointment by reference to specific regulated activities. In that respect, the FCA's report is not surprising. In particular, the report stated that shortcomings found in respect of appropriate risk transfer arrangements were "concerning". Annex 1 to the thematic review provides a helpful summary of the key regulatory requirements.

  • However, having compliant documentation in place is not enough. Many of the issues identified by the thematic review are operational, relating to the actual oversight and monitoring of ARs. We are aware of one multinational general insurer which does not enter into AR arrangements without board approval as the regulatory risk of taking responsibility for ARs is deemed too high. However, even if the insurer itself does not enter into AR arrangements, this does not get the insurer off the hook. Insurers at the top of the distribution chain need to satisfy themselves about arrangements all the way down the chain. If business is coming from a broker's AR, an insurer should satisfy itself that the broker's AR agreement meets the relevant legal requirements AND is being properly monitored. This is not simply a reputational issue, the insurer will be at risk of regulatory censure.

  • Monitoring needs to look at the scope of the AR appointment. For example, if an AR agreement covers arranging insurance, it will not cover advising on insurance or dealing as agent (e.g. under a binder). It follows that any such advice would be being given in breach of the general prohibition under s19 FSMA and therefore a criminal offence. Furthermore, the AR's activities should align with those of the principal. A principal should not be taking regulatory responsibility for an AR whose activities fall outside the expertise of the principal.

  • Imbalance in the AR relationship was a key issue identified by the FCA (for example where the AR is a large retailer which owns the customer relationship). We have had experience of this. Firms must not allow an imbalance in the relationship to hinder their oversight of the conduct of the AR.
     

Practical Steps

  • Check that you have an AR policy setting out:Audit your existing AR relationships including associated documentation. Whilst the thematic review did not specifically consider introducer appointed representatives, firms are advised to audit their introducer appointed representative arrangements. Remember, the permitted activities of an introducer appointed representative are extremely limited.

    • what steps need to be taken before you enter into an AR arrangement;

    • how ARs will be monitored during the term of the principal-AR relationship.

  • Ensure all terminated AR arrangements have been notified to the FCA.

  • Consider if extra resource is required when new ARs are appointed. Perhaps ask Compliance (or the relevant team) to estimate the number of man hours required to effectively oversee a new AR relationship.

  • An intermediary which appoints ARs should ensure that its professional indemnity insurance (as required under MIPRU 3) covers the conduct of its ARs as well as the intermediary's own conduct.

  • Check that all relevant individuals have been appointed as approved persons (the FCA found failings particularly with ARs who primary or only activity was the distribution of general insurance).