The FCA has urged principal firms to strengthen their oversight of inactive appointed representatives (ARs) following a supervisory review which found gaps in governance, reporting and consumer protection.
The review found that an unexplained lack of reported regulatory activity from ARs was “an indicator of weakness” in the governance, monitoring, oversight and risk management within the principal firm.
It added that it also believes the weaknesses could lead to increased risk of consumers being misled and suffering harm.
While there are a range of possible reasons why ARs may not carry out all regulated activities, the FCA said that it expects principal firms to understand and clearly explain those reasons.
The FCA review found that a lack of reported regulated revenue from an AR does not always mean an absence of activity. It highlighted examples where regulated income was incorrectly recorded as unregulated or where revenue was incorrectly attributed to other parties instead of the AR.
The regulator called for an improvement in the quality of explanations provided in regulatory returns, saying that descriptions such as ‘not trading’ or ‘no business introduced’ do not adequately clarify the underlying reasons for AR inactivity.
It called on principals to refer to its REP025 FAQ page and guidance to support accurate reporting of the reasons for AR inactivity.
The FCA noted that retail finance providers, funeral plan providers and asset management firms were most likely to report ARs that carry on no regulated activities for a period of time, reflecting the nature of the ARs business.
The regulator reminded that good practice from principals includes establishing clear expectations at onboarding, establishing the amount of expected regulated activity with greater monitoring in the early stages of the relationship to check expectations are being met.
On reviewing AR agreements, the FCA review found that some did not meet regulatory requirements. This included principals not clearly accepting responsibility for the regulated activities carried on by ARs.
The review studied two years of data from regulatory data returns including information from principals about AR complaints and revenue generated.
Another concern the FCA found in its review is that some principals allowed ARs to remain inactive for extended periods. It said that in some cases ARs remained on the Financial Services Register despite having ‘no intention’ of carrying out regulated activity, which the FCA warned could create a misleading impression to consumers of regulatory protection where there is none.
It also found some instances of ARs misrepresenting their regulatory status in consumer communications, describing themselves as ‘authorised’ when they were not directly authorised. It reminded principal firms that they are expect to monitor AR communications closely.
• Financial Planning Today Analysis: Appointed representatives are agents of authorised principal firms and many run successfully on a semi-autonomous basis. This is both a regulatory risk but also a flexible and important part of the retail finance distribution chain. There is no doubt that many appointed reps are well run, robust businesses and provide a useful service to consumers. They hand over much of the compliance responsibility to their principals and concentrate on what they do best, serving customers. There is also no doubt that badly run AR firms have created a huge amount of consumer harm over the years, with many failing and leaving a mess behind them or substantial compensation bills. The FCA in recent years has done it's best to tidy up this messy and problematic area of the regulatory sphere and it is reasonable to say AR firms are much better supervised than they used to be. This latest FCA report however highlights issues with the monitoring of inactive AR firms and all principal firms and AR firms should note its findings. If the AR sector is to continue it must improve and it cannot be the Achilles heel of the regulated advice sector.