On 22 July 2016, the Financial Conduct Authority (FCA) published the results of a thematic review in which the FCA found significant shortcomings in the control and oversight of appointed representatives (ARs) by their principal authorised firms in the general insurance sector.
The FCA found that almost half of the principal insurance firms could not demonstrate that they understood the nature, scale and complexity of the risks arising from their ARs' activities. The FCA also found examples of potential mis-selling and customer detriment resulting from the actions of the ARs, which principal firms had failed to identify.
As a result of the findings, the FCA has intervened early, taking the following actions in relation to five of the principal insurance firms:
- commissioning two section 166 skilled person reviews to assess whether detriment has been suffered by customers from mis-selling and to consider the adequacy of systems and controls
- asking two firms to cease sales activities
- agreeing the imposition of requirements on all five firms’ regulatory permissions to stop them taking on new ARs, and
- considering the need for customer redress and any further regulatory action.
In light of the FCA's findings, firms should consider their processes and controls around ARs. We can assist you with the reviews of such processes and with any supervisory or enforcement issues which may arise as a consequence of any breaches of the FCA's requirements.
The FCA conducted an online survey of 190 principal authorised general insurance and insurance mediation firms. These 190 principal firms had over 6,000 ARs with 75,000 individual representatives operating in 15,000 locations, selling more than 10 million policies (predominantly to retail customers) and generating annual revenues of more than £500 million.
The FCA then selected a sample of 15 principal firms using a risk-based approach and obtained further information on these firms. These 15 principal firms had 783 ARs with 10,594 representatives operating in 1,684 locations. FCA staff visited 14 of the 15 selected principal firms and 25 ARs. During the visits, FCA staff met with and interviewed senior management and staff, reviewed policies and procedures, contractual documentation, customer-facing documentation and customer files, and listened to sales calls.
The FCA found that almost half of the 15 principal firms could not demonstrate that they considered and understood the nature, scale and complexity of risks arising from their ARs' activities and, in particular, the risks these activities presented to customers. Some ARs conducted activities outside their principal's core area of expertise, where the principal lacked the ability or resources to oversee them effectively.
The FCA also found that over half of the 15 principal firms could not consistently demonstrate that they had effective risk management, oversight and control frameworks to identify, monitor and mitigate the risks arising from their ARs' activities. The FCA found that many principal firms had shortcomings when engaging ARs including in categorisation, setting up multiple principal arrangements and implementing the approved persons regime (ie failing to ensure that ARs were fit and proper for their role).
Many principals could not demonstrate that they had adequately considered the solvency and suitability of their ARs, nor the impact on their own compliance with the authorisation threshold conditions and the adequacy of their controls and monitoring resources.
Impact on customers
The FCA found that shortcomings in principal firms' risk management, control and oversight meant that they were not able to ensure their ARs compliance with relevant rules - notably the requirements of the FCA's Principles for Business (PRIN) and the Insurance: Conduct of Business Sourcebook (ICOBS) - and this gave rise to risks for their customers.
In a third of the sample principal firms, the FCA found examples of potential mis-selling and customer detriment due to AR actions - most of which principal firms had previously failed to identify. These included customers buying products they did not need, under which they may be ineligible to make a claim, and/or without enough information to make an informed choice.
In one case, the FCA found significant evidence of actual mis-selling leading to actual customer detriment: as a result of poor sales practices and inadequate sales calls, some customers were poorly informed and bought warrant insurance for which they were clearly ineligible.
In addition to disciplining some of the 15 principal firms included in the sample, the FCA stated that it expected principal authorised firms to comply with their regulatory obligations to:
- consider the impact of ARs on their own business model and ability to meet threshold conditions
- assess the solvency and suitability of their ARs
- take reasonable steps to establish an appropriate risk management framework to identify and manage the risks ARs present to their business
- establish compliant contractual arrangements with their ARs
- ave adequate controls over their ARs’ regulated activities for which the principal has responsibility, and
- have adequate resources in place to monitor and enforce compliance with the relevant requirements that apply to the regulated activities for which the principal is responsible.
How we can help you
DLA Piper has a dedicated regulatory team with extensive experience acting for authorised general insurance and insurance mediation principal firms.
We can advise and help you to develop and implement robust controls and ongoing risk management for ARs, to meet your regulatory obligations and satisfy any regulatory scrutiny.
If you would like advice regarding oversight of your authorised representatives or interactions with the FCA, please contact Michael McKee or Chris Whittaker.