Principals and their Appointed Representatives – are principals meeting their supervision obligations? Maybe

The FCA has published its findings into how principals are doing when it comes to the new FCA rules (effective from 8 December 2022) for overseeing/supervising appointed representatives (ARs). The findings paint a mixed picture and will be relevant to those in the FCA regulated market involved with networks which means not just advice firms but also brokers (mortgage brokers and insurance brokers) that operate network structures.

Scope of the FCA's review

Principals are responsible for overseeing their ARs.  At the end of 2022 the FCA introduced new rules where, in broad terms, the FCA increased the obligations on principals when it comes to overseeing their ARs.

The FCA has "tested" 270 firms (said to be c. 10% of the principal population) on how the new rules are bedding in.  The FCA conducted a telephone questionnaire with 250 firms participating and where principals were asked about – their AR oversight, how they ensure their ARs don’t act outside of their appointments, onboarding and termination processes, how principals monitor changes and growth at ARs and whether principals delegate tasks or functions to their ARs.  Alongside the telephone questionnaire, the FCA randomly selected 23 principal firms for an in-depth assessment where it reviewed information and documentation of those firms.

The FCA's findings

The FCA says that it found principals had "made some effort" to comply with the new rules but "not all principals" could show they had undertaken an adequate annual review or self-assessment covering all points as set out in the FCA Handbook SUP rules.  In particular, SUP 12.6A sets out the detail of the annual review including basic checks such as checking the AR is solvent, its fitness and proprietary and ability to carry out the regulated activities for which the principal is responsible and checking the adequacy of controls over and resources for monitoring and enforcing compliance.  Reviews are also triggered where an AR changes its business model, the scope of its agency is expanded, there are changes to senior management or "a significant in the number of complaints" about the AR.  There is also a requirement on the principal to conduct a self-assessments looking at its compliance in broad terms to check it remains robust and again the detail of that is set out in SUP 12.6A. 

The FCA reports that 1 in 5 firms had not conducted required checks (whether the self-assessment or annual reviews) and that the quality and completion of both the self-assessment and annual review requires improvement.  In particular, out of the firms conducting reviews "approximately half of these were of good quality" (52% of self-assessments and 43% of annual reviews were considered of good quality as part of the in-depth review) and those principals involved in in-depth assessment "had not properly documented their self-assessment or annual reviews, or took a tick box approach to completing them".

The FCA sets out examples of good practice and areas of improvement.  When it comes to the self-assessment the FCA note examples of good practice as using a broad range of management information and adopting a RAG (red-amber-green) rating system.  Areas for improvement include a high level tick box approach and not documenting and addressing a clear action plan for any material deficiencies or concerns with compliance identified in the self-assessment.  For annual reviews, good practice is noted as embedding consumer duty compliance into the review and assessing AR activity to prepare a full analysis of their activity and business to feed into the annual review.  Areas for improvement are noted as relying on limited information about the AR and lack of evidence gathering.

The review also looked at how principals monitor whether an AR is acting within the scope the principal permitted – i.e. within the AR agreement.  From the telephone questionnaire 66% of firms said they used data and management information to monitor ARs activities, over 50% regularly reviewed the AR agreement as well as making regular firm facing visits or holding meetings, less than 33% checked consumer facing materials such as leaflets and websites.  Good practice in this area is noted as including mystery shopping exercises and reviewing all new financial promotions for compliance.  Areas for improvement are noted as failing to check consumer facing materials and not undertaking file reviews or observing interactions between ARs and consumers.

The review also looks at the onboarding of ARs (important for firms taking on Tenet's ARs in particular) and the termination of AR relationships.

What next?

The FCA review is a follow-up to the new rules.  Overall the picture is a little mixed and principals will want to ensure that they reflect on the FCA's good practices and make sure they are adopted to mitigate against rogue ARs and also to ensure they are meeting their regulatory supervisory obligations.  An area to keep under review for those in the FCA regulated advice and broker sectors.