The imposition of the new requirements highlights a ‘structural weakness in the present regime’, says financial services partner

The FCA last week (3 August 2022) confirmed new rules that make authorised insurance firms more responsible for their appointed representatives (ARs).

As part of these new rules, regulated firms within the insurance sector will be required to action enhanced oversight of their ARs – including ensuring that they have adequate systems, controls and resources – and must provide complaints and revenue information for each AR to the FCA via annual reports.

Insurance firms will also be required to assess and monitor the risks that their ARs pose to consumers and markets via oversight that is equivalent to what must be completed for their own businesses. 

Furthermore, firms additionally must review information on their ARs’ activities, business and senior management annually.

An AR refers to an individual or firm that operates within a regulated industry. Rather than being directly authorised by the FCA, ARs act as agents for a firm that is authorised, which is referred to as the principal.

Principals hold most of the burden of regulatory compliance and provide other services in exchange for a share of commission ARs generate through insurance sales.

The FCA’s new rules on ARs will come into force on 8 December 2022. As part of these enhanced reporting requirements, the regulator has warned principals that they will receive requests for information about their ARs in 2022.

The new rules do not change the fact that principals are responsible for the activities of their ARs. The FCA explained that it was working with Her Majesty’s Treasury to “explore if further changes are needed to the AR regime, which would require future legislative change”.

Better managed

Sheldon Mills, executive director for consumers and competition at the FCA, said: “While appointed representatives can bring innovation and choice, principals and ARs account for more than 60% of the total value of recent claims to the Financial Services Compensation Scheme.

“They also generate up to 400% more supervisory cases and complaints than directly authorised firms.

“The changes we’re making will help ensure that principals manage their ARs better – ensuring that they provide the oversight needed to avoid consumers being mis-sold or misled and to make sure markets can operate safely and fairly.”

Due diligence

Branko Bjelobaba, principal at financial compliance consultancy Branko, said that many of these requirements around ARs were already in place, but that they had not been entirely respected by principals.

He explained: “To be honest, we’ve had most of this up to now and principals have chosen to ignore the due diligence and monitoring requirements placed on them for their ARs.

“Being an AR doesn’t mean you can do away with all aspects of regulatory compliance – it means that the principal shares their responsibilities and accepts responsibility for what you do - good and bad.”

He added that principals should already be providing oversight of their ARs via regular engagement and training, to ensure that all duties were being performed correctly.

“This is exactly what you should be doing in your own business and thus extending it to your ARs has been logical since the onset of statutory GI regulation in 2005,” he added.

“The only brand new thing is the [requirement to report revenue information annually] – up to now, this has been totalled for the principal and their ARs, but now requires splitting out.

“This will show the FCA how well some ARs are doing and it might show that the AR could be in a stronger position than the principal – the principal would then need to reflect that in appropriate regulatory reserving.”

Regulatory lacuna

Simon Morris, financial services partner at law firm CMS, said that the current AR regulatory environment was an “anomaly”.

He explained: “Created nearly 40 years ago, it enabled insurance distributors to tie to an insurer to avoid direct regulation.

“Since then, it has mushroomed, with ARs sometimes larger or more complex than their regulated principals and generating disproportionate costs, claims and complaints.

“The FCA recognises that it is no longer fit for purpose and is taking first steps to tighten this regulatory lacuna.”

Morris added that the new rules around oversight of ARs were so “obvious” that their absence highlighted “structural weakness” in the present regulatory environment.

“If this doesn’t work,” he said, “the FCA has raised two future possibilities – limiting the aggregate size of a firm’s AR and imposing a tighter regime where a firm’s ARs carry on independent businesses separate from that of the firm.”