The Financial Conduct Authority’s (FCA) supervisory work related to inactive appointed representatives (ARs) has resulted in networks removing 11 firms, according to the regulator.
As part of its review, the FCA warned principal firms and networks needed to be more aware of issues around their inactive ARs and undertake greater scrutiny.
Its review of good practice and areas for improvement found many principal firms were taking appropriate steps to manage risks arising from AR relationships, including where ARs carried on no regulated activities.
However, the the regulator said it’s “proactive regulatory engagement” prompted change at seven of the 14 principal firms it reviewed – with 11 ARs offboarded and principals “strengthening their monitoring arrangements”.
Furthermore, it highlighted that in some cases, AR agreements reviewed did not meet regulatory requirements.
This included principals not clearly accepting responsibility for the regulated activities carried on by ARs and not including required terms set out in regulatory rules.
“Where agreements were non-compliant, principals were asked to amend them and provide assurance deficiencies had been addressed,” it said.
The FCA also called on principals to actively and appropriately engage with their ARs through oversight, and use robust data quality, and governance, including additional measures when an AR is inactive.
They should also accurately report revenue generated by the AR and any reasons for periods of inactivity through the regulatory return, monitor the appropriateness of their AR relationships and take timely steps to ensure the Register remains up to date and the principal’s risks are mitigated.
Scope of review
The FCA said as principals were responsible for AR oversight and liable for harm caused by their ARs, it expected principal firms to consider AR arrangements where ARs were not routinely carrying out regulated activities and reflect on whether oversight, monitoring and governance practices remain appropriate.
The regulator added it also expected principals to provide accurate and clear explanations in regulatory returns where ARs have not carried out regulated activities during the specific reporting period and take timely action to terminate AR relationships where they are no longer appropriate.
They must also notify the FCA when the status of the relationship changes.
Using two years of regulatory return data including information collected from principals about AR complaints and revenue generated, the regulator assessed how principal firms oversaw ARs that carried on no regulated activities for some time.
Its work focused on whether principals could clearly explain the absence of income from regulated activities, whether they were accurately reporting AR activity to the FCA and if they could demonstrate effective oversight of the AR’s business.
Areas for improvement
The FCA found some principals who could not demonstrate effective oversight, lacked a clear and up to date understanding of their ARs’ business models and could not explain why their ARs had conducted no regulated activity for a period of time.
Some principals allowed ARs to remain within their network for extended periods without carrying on regulated activities and they did not engage with the AR to understand the reasons for this or reassess whether the AR relationship remained appropriate.
The regulator found suspension may be appropriate in limited circumstances, such as when the principal was actively investigating the AR and there was a realistic prospect of resolution.
However, it should not be used as an indefinite alternative to reassessing the appropriateness of the AR relationship.
Where concerns were not resolvable within a reasonable timeframe, principals should consider whether they needed to take further action, it said.
The FCA also noted some principals did not adequately monitor how ARs presented themselves to consumers – this increased the risk of misleading consumers about their regulatory status, particularly where ARs had not actively carried on regulated activities for some time.
The regulator also observed a growing trend of ARs incorrectly referring to themselves as ‘authorised representative’ which is not the correct designation for an AR.
