The FCA has published a report setting out the findings of a thematic review it has carried out on principals and their appointed representatives (ARs) in the general insurance sector (TR16/6).
Whilst the report focuses on the general insurance sector, the FCA has emphasised the importance of the findings being noted by all other regulated financial firms who are principals with ARs. Overall, the FCA categorised its findings as follows:
- Business models and risk management. Almost 50% 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 provide oversight effectively.
- Governance and oversight. Over half of the principals reviewed 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.
- Customer outcomes. For many of the principals reviewed, the shortcomings that were apparent in risk management, control and oversight led to risks to customer outcomes, as the principal was not able to ensure its ARs complied with the relevant requirements. In a third of the principal firms, the FCA saw 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.
Aside from the early intervention steps that the FCA has taken against five of the principal firms and their ARs who were included in the review, the report also confirmed the next steps the FCA is intending to undertake following the report. Of interest are the following:
- ‘Dear CEO’ letters to be sent to the chief executive officers of relevant principal firms setting out the FCA’s expectations and what actions it expects them to take to address the issues raised in the report.
- Plans for the FCA to perform additional work with some of the firms in the wider survey sample who were not included in the more detailed work. This will focus on firms that the FCA believes to be higher risk and those where the FCA had concerns regarding the quality of data provided to it.
- Consideration of the need for further thematic or supervisory work, and expectations that this will remain an area of supervisory focus.
- Consideration of the need for other regulatory actions as a result of the findings of this report, including assessing whether there is a need for policy intervention or to adjust the FCA’s approach to authorisations.
- Active engagement with the sector to discuss how best to take these matters forward, including via engagement with relevant trade bodies.
The FCA expects all principals across the regulated financial industry to consider the findings and take appropriate action, where applicable, to address the issues that are relevant to them.