Increased scrutiny on Appointed Representatives

Following the FCA’s introduction of tighter rules on oversight of Appointed Representatives (ARs) in December 2022, we examine the scope for potential claims arising from the burden placed on regulated firms to oversee and ensure compliance by their ARs with the FCA’s rules.

In 2018/2019, AR claims comprised 61% of the value of claims to the FSCS totalling £670 million. In a bid to combat the pressure on the Financial Services Compensation Scheme (FSCS) fund and reduce the number/value of claims, the FCA launched a dedicated AR department to target potential harm by ARs and their principals.

In August 2022, the FCA issued a policy statement as a result of ARs generating up to 400% more supervisory cases and complaints than directly authorised firms. The policy statement sets out the responses and the FCA’s feedback to proposed changes to the AR regime, plus the final rules.

The FCA then introduced new rules in December 2022 as a reaction to the disproportionately high level of complaints and supervisory cases against principals of ARs. The new rules are designed to ensure higher levels of due diligence and ongoing oversight of ARs by their principals who are responsible for ensuring compliance during regulated activities. Currently, there are around 2,900 principal firms with approximately 35,000 ARs (of which 14,000 are Introducer ARs) reporting into them.

FCA’s reminder for principals

On 28 September 2023, the FCA published a regulation round-up in which they reiterated the requirement for firms to provide the FCA with more information about their ARs when completing the annual Firm Details Attestation (FDA). The AR details must include the following information:

• If they have more than one principal.
• If their details have changed from last year or have been recently updated.

FDAs must be completed within 60 business days of the firm’s annual referencing date.

Principals are also required to closely monitor if an AR’s business grows significantly, if they receive a surge in complaints or if they have a high staff turnover. The consequences for failing to report will incur a late return notification, £250 late return fee, and possible enforcement action.

In its latest publication on ARs, the FCA has also highlighted the importance of considering the new rules alongside the new consumer duty, which came into force this summer. The FCA has written to over 3,000 principals about their obligations to properly oversee the conduct of ARs. Ten firms, four of which are insurance brokers, were placed under restrictions in May 2023 by the FCA for failing to meet expectations on ARs. The FCA has subsequently sanctioned one firm who has been ordered to pay £400,000 in compensation, but avoided a fine due to financial hardship.

Since the implementation of the FCA’s AR targeted department, it has required termination of more than 1,300 relationships between principals and ARs. Whilst the 2022 rules are intended to reduce the number of complaints made to the ombudsman and FSCS, it is likely that the spike in FCA enforcement action will continue into 2024.

Key takeaways for principal firms:

1. Be aware of, and comply with, the FCA’s new rules (see the August 2022 Policy Statement for details).
2. In particular, be in a position to demonstrate that you have a structured plan and procedures, as well as appropriate designated resource, for overseeing ARs.
3. Be aware of the Consumer Duty Finalised Guidance which reinforces the new rules.
4. Ensure IARs are sticking to their limited activities. Principals will be responsible for appointment checks and overseeing the IAR as an AR, if IARs stray into AR activity.
5. Ensure you have adequate professional indemnity insurance (PII) cover for current and former ARs (MIPRU 3.2.4). Bear in mind that principals are responsible for the conduct of all their ARs (MIPRU 3.2.6). Even where ARs hold their own PII cover:

• There is a bigger claims risk if a principal has not complied with the new rules on oversight; and
• The principal will often have to defend or settle the claim before seeking an indemnity/contribution from its AR.

6. If your policy excludes or limits cover for acts or omissions of your ARs, make sure your ARs maintain adequate PII cover. When agreeing cover, bear in mind that policy exclusions and/or limitations are only permitted by the FCA in limited circumstances in any event.

Comment

Insurers writing PII cover regularly ask questions about a firm’s use of ARs. One might now expect those questions to include more detail around oversight of ARs.

Related items:

• Professional liability report 2023: trends and future risks
• Insurers and intermediaries: UK legal and regulatory certainties for 2022 - Part 1: Key issues

Read other items in Professions and Financial Lines Brief - March 2024