The number of appointed representative (AR) firms operating in the insurance sector has halved in the last decade, with a sharp drop in the last two years.
The Financial Conduct Authority (FCA) also warned about “weak AR recruitment arrangements” from principal firms and highlighted concerns about introducer and overseas ARs and professional indemnity insurance (PII).
According to the regulator, there were 9,489 ARs operating in the general insurance and protection (GI&P) market at the end of May.
This was down from 10,196 at the end of December and was a 36% fall from 14,795 in just two years, partly precipitated by the regulator’s recent focus on the AR sector.
However, the figures show a longer-term trend with the population of insurance-based ARs halving from 20,083 at the end of 2014.
At that point GI&P ARs made up 60% of the 33,912 total AR population, but that fell to 28% of 36,788 in December and has now shrunk further to 27% of 35,200 in May.
Meanwhile, the AR population of mortgage intermediaries has fallen below the 2018 level when it was 5,608 – after climbing to 6,222 in December 2020 it has since dropped to 5,230.
In contrast, the number of ARs within the consumer finance market as a whole has expanded greatly – from 4,730 in 2014, to a peak of 17,836 in 2020 to holding steady at around 15,500 most recently.
‘Weak AR recruitment strategies’
In its latest update and assessment of the AR market, the FCA warned firms that becoming an AR “should not be seen as an easy route into the regulatory perimeter”.
“The principal is responsible for making sure the AR is fit and proper, complies with our rules and operates within the scope of their appointment,” it said.
The FCA noted it often saw principal firms submitting applications without declaring full regulatory histories and “frequent examples among the outlier firms with weak AR recruitment arrangements”.
“This includes applications partially or inadequately completed, references not asked for or checked, overlooking a lack of experience or knowledge and not sufficiently considering or managing conflicts of interest and personal relationships leading to less rigorous due diligence,” the FCA said.
“Where we have seen significant issues, principal firms have agreed to stop recruiting ARs until these issues are addressed.
“Effective recruitment of ARs is the best tool principals have in preventing those who are unqualified or unsuitable access to consumers and their money.
“As well as being vital for consumer protection, this is crucial for the future of the principal firm and the integrity and competition in our markets.”
Since opening its new AR department principal firms have ended arrangements with more than 1,300 ARs, the FCA noted.
And it contested that the average time to determine an application to perform an AR controlled function was 25 days, but lack of information caused delays with principals regularly failing to provide an explanation or rationale for appointing an individual after disclosing adverse information about the candidate’s fitness and propriety.
Introducers, overseas and PII concerns
Alongside these issues, the FCA highlighted Introducer ARs (IARs), overseas ARs, and PII and capital adequacy as its chief concerns in the sector.
For IARs, the regulator found these are lower risk, provided they are strictly limited to their scope and therefore it is critical principal firms ensure they do so.
If an IAR is acting beyond the scope of its appointment, it may be committing an offence.
“We have seen a number of cases where IARs have acted beyond their scope,” the FCA said.
“For example, in one case, the IARs had non-compliant financial promotions and carried out unsolicited contact of consumers involving regulated activity outside the principal AR agreement.”
There are around 170 overseas ARs, accounting for less than 1% of all ARs, the regulator noted – highlighting the difficulties in co-ordinating differing legal, accounting, and regulatory requirements.
However, it warned that supervisory engagement has led to some principals choosing to terminate contracts with some or all their overseas ARs.
“We are using profiling tools and outlier analysis to helps us focus on the right firms for supervisory engagement and to learn more about the potential harms and benefits of this model,” the FCA said.
Regarding PII the FCA found a minority of principals either held only partial cover or were relying on insurance taken out by the ARs themselves.
It also saw some firms with incorrect policies that did not cover ARs and had significant exclusions that greatly limited cover.
“In these cases, we have taken action to address this and make sure appropriate cover is in place,” the FCA said.
“We have also written to all principal firms to clarify that we expect them to hold PII for all their ARs, at an appropriate level of cover where required, and to hold adequate capital to cover the ARs’ activities.”
It is also consulting on changes to clarify PII requirements for principal firms in the September 2023 quarterly consultation paper.
More assertive scrutiny
Concluding its review, the FCA said it would continue to use improved data to strengthen scrutiny of authorisations and approvals and supervise high-risk principals more assertively.
“We will use our new authorisation forms, new regulatory returns and a dataset covering all ARs from our December 2022 information requirement, which asked principal firms for information about their ARs. We will also undertake deeper analysis of existing data,” it said.
“We will use all the tools at our disposal where we see harm emerging, for example attestations for senior figures, requirements on firms, skilled persons reviews and appropriate enforcement action.”
