The Appointed Representative/Principal business model has evolved since its infancy, with many brokers and insurers offering routes to FCA authorisation. But what are the risks of jumping into bed with the wrong Principal?
This question has become increasingly important since the 2nd half of 2016, when the Financial Conduct Authority released the findings of a thematic review into Appointed Representatives (ARs) and the Principals they work with.
The review highlighted shortcomings in some Principal firms’ understanding of the rules and their compliance with the requirements. In the FCA’s own words, “the issues we identified were serious and widespread, and showed that over half of the Principal firms did not fully understand the risks arising from their ARs’ activities, or were unable to demonstrate that they were complying with their obligations to control and oversee these activities.”
Whilst some of the findings were related to firms with a large number of ARs who were not ‘insurance people’, the findings highlight the responsibilities that all firms take on when appointing an AR.
The Principal is responsible for any regulatory shortcomings that might occur with their ARs, and must therefore put in place an appropriate risk management framework to identify and manage the risks that the individual ARs present to their business and to clients.
The regulator will undoubtedly be more involved in AR networks, with the possibility of further thematic work or regulatory actions as a result of last year’s findings.
What does this mean for the AR model?
2016 saw substantial movement of ARs between Principals, and 2017 is likely to see an acceleration in this activity as the market reacts to the review. Some insurers and intermediaries who have played around with ARs are reconsidering the future in light of the FCA review, while more and more ARs are questioning the relationship with their Principal and the value of that relationship:
- Is the Principal providing appropriate control and oversight of their AR’s activities?
- Do they have the right knowledge, experience and resources to support and supervise the ARs?
- Is the AR’s business model or specialism within the Principal’s area of expertise?
- Is there a contract that clearly sets out the responsibilities of both parties?
- Can they provide support to ensure that customers are treated fairly and have access to insurance products that meet their needs?
- Do they provide access to tools and materials to assist the AR in achieving compliance with their responsibilities?
If the answer to any of these questions is ‘no’ then the AR should probably consider whether they have the right partner. Making the wrong choice could put the business in jeopardy and present a reputational risk which, should the unthinkable happen, it may be impossible for even the most compliance conscious AR to recover from.
It is important to remember that becoming an AR is not a short-cut to authorisation and due diligence is critical to ensure a good fit for both parties. The AR model is here to stay, but only those with robust governance, business models and selection processes will survive.