Over the last twelve months, many principal firms, looking to onboard Appointed Representatives (ARs) or Introducer Appointed Representatives (IARs), will have noticed a significant increase in the level of scrutiny applied by the Financial Conduct Authority (FCA) prior to their approval. This is largely due to the fact that in December 2022, new rules were introduced to improve oversight of ARs and ensure more detailed information was provided to the FCA regarding the activities of ARs/IARs. A few months prior to implementing these new rules, the FCA also established a dedicated AR supervision team to improve the regulators oversight in the AR regime.
Principal firms with credit broking permissions are primarily at the receiving end of increased scrutiny by the FCA as it identified a number of ‘key harms’ in the sector during an initial review in its work to improve the AR regime. Last month, the FCA published a webpage specifically to inform them of these key harms and the drivers of harm in the sector.
Whilst many principal firms will already have sufficient onboarding, monitoring, and exit procedures in place; it is evident that this is not the case with all firms. Additionally, the Consumer Duty imposes further responsibilities on principal firms as they must ensure that their ARs/IARs achieve positive outcomes for customers and comply with the consumer duty regulations. This adds pressure on principal firms to maintain high standards and accountability for their representatives’ actions and customer outcomes.
The FCA was concerned that some principal firms had inadequate systems and controls for onboarding ARs as well as ongoing monitoring. This was often due to a lack of resources being in place within a principal firm. Whilst there is no set ratio for the number of staff a principal should have to maintain oversight of its AR activity, this could range between 1:5 (full time employee to No. of ARs) up to 1:15 depending on type of activity and volume.
In its recently published webpage, the FCA noted the following good practices that principal firms with adequate controls had implemented:
- Direct control of relevant sections of the AR website to ensure compliance of any financial promotions or GEN 4 disclosures;
- Ability to limit or block access to a firm’s systems for failure to comply with the terms of the AR agreement or relevant rules and legislation;
- Contacting consumers who had been introduced to finance by an IAR to ensure the IAR did not act outside the limited regulated activities they can perform;
- As part of quality audit, together with file checks, compliance staff also observing ARs’ interaction with consumers;
- Getting consumer feedback to ensure ARs were not acting out of scope or mis-selling products;
- Monitoring the AR’s financial position on an ongoing basis, not just at onboarding, allowing firms to react to any significant events;
- Where ARs were not conducting regulated activities, firms engaged with ARs to understand the reasons for this and considered whether the AR relationship needed to continue; and
- Using automated processes to identify outlier behaviours by the AR, which could lead to potential consumer harm.
In my opinion, this increase in scrutiny is long overdue, given that the FCA’s findings regarding Principal firms have historically been mixed. The AR regime has been very successful over the years in more matured financial services sectors such as Mortgages & Insurance, yet in Consumer Credit it is believed that less effective controls have been in place.
Any principal firm looking to appoint ARs/IARs or have appointed ARs/IARs should take note of the latest publication and consider this as part of, not only an application to the FCA, but your ongoing responsibility in meeting the Consumer Duty requirements.
