The Financial Conduct Authority’s (FCA) thematic review of general insurance firms acting as principals and their appointed representatives1 revealed that most principals could not consistently demonstrate that they understood the regulatory requirements when considering the appointment of an appointed representative.
In the UK general insurance sector, there are approximately 20,000 appointed representatives (ARs) which accounts for 25% of all ARs registered under the UK regulatory framework. ARs are exempt from authorisation under the Financial Services and Markets Act 2000 as their ability to carry on regulated activities is due to their principal firm being responsible for their regulatory obligations. Any act or omission done by the AR is considered as being committed by the principal itself. You would therefore expect a principal firm to consider these appointments seriously.
The FCA’s review was based on a selected sample of 15 firms, which included visiting 14 of those firms and 25 ARs.
Part of that review focused on three key areas: (a) business models and risk management, (b) governance and oversight and (c) customer outcomes. The findings were disappointing across all three.
Over half of principals in the sample could not consistently demonstrate that they had effective risk management, oversight and control frameworks to identify, monitor and mitigate risk arising from the activities of their appointed representatives.
In respect of customer outcomes, the review made it apparent that there were short comings with principal firms’ risk management systems and oversight and control systems. These failures present a heightened risk of customers buying insurance products which may not be suitable for them or in some cases doing so on an uninformed basis.
Unsurprisingly, the review was a cause for concern for the FCA. Two cases resulted in section 166 skilled persons report to be commissioned to address issues identified and another principal firm’s permissions were removed with the principal firm leaving the industry.
The FCA’s expectation of principals to demonstrate that they consistently comply with their regulations is not an unrealistic one but following the “Dear CEO” letter sent by the FCA to the chief executives of principal firms, it will be interesting to see whether those firms improve upon the issues identified in the review.