The Financial Conduct Authority (“FCA”) have provided further insights which build on their policy statement (PS22/11) and SUP12 to improve their Appointed Representative (“AR”) regime. These new rules for Principal and ARs were introduced in December 2022, ushering in clear expectations on firms to ensure they have a higher standard of due diligence and ongoing oversight of their ARs.
The FCA have undertaken work to assess how firms are properly implementing the new rules and is increasing its engagement with firms and other stakeholders. As part of this work, the FCA have reviewed key harms caused by ARs and Introducer Appointed Representatives (IARs) who undertake credit broking activity.
What concerns have the FCA raised?
Initial Appointment of AR/IAR
The FCA’s Handbook and guidance notes set out firms must have robust procedures, systems, and controls to conduct appropriate due diligence on prospective AR/IARs. Before onboarding, Principal firms must ensure that the prospective AR/IAR is;
- Solvent
- fit and proper, and;
- has no close links that could hinder effective supervision
The FCA found evidence of inadequate systems and controls in some firms’ onboarding processes, such as outdated procedures, lack of criminal or credit checks, and insufficient adverse media or Companies House checks. Some firms lacked the resources to effectively oversee a large number of ARs/IARs and demonstrated poor understanding of the associated risks.
It’s important for businesses seeking a Principal firm to ensure that any potential Principal undertakes robust and appropriate checks on their firm and the individuals controlling the business. Firms seeking a Principal firm should expect any potential Principal to have;
- Documented onboarding procedures
- Robust evidence and audit trails meeting oversight obligations
- Initial and ongoing training for ARs about their regulated activities and regulatory expectations
- Thorough due diligence, including financial reviews and anti-money laundering checks.
- Compliance checklists for vetting potential ARs
- Requiring ARs to complete compliance calls and training before starting regulated activities
Ongoing Oversight of AR/IARs
Principal firms must have adequate systems and controls to monitor their AR/IARs on an ongoing basis, ensuring they continue to operate within the regulatory remit and do not pose undue risks to consumers.
Principal firms need a thorough understanding of the risks and harms associated with using AR/IARs to implement effective monitoring. They must also have sufficient resources to maintain ongoing oversight and ensure AR/IARs remain compliant. Larger ARs can present challenges due to their complexity, requiring principals to have the necessary skills and resources for effective oversight. Financial resources may also be necessary to address failures or provide appropriate redress to consumers.
Firms seeking a Principal should expect any potential Principal firm to have in place;
- Ongoing monitoring of AR/IAR’s financial position,
- Collection of robust management information
- Review, signoff and monitoring of relevant sections of the AR/IAR website and financial promotions
- Quality reviews/audits
- Regular review meetings and support
- Monitoring customer interactions, either directly or through consumer feedback.
Ending AR Relationship
The FCA also reviewed how Principal firms end AR/IAR relationships, particularly how well they follow the guidance in the FCA’s Supervision Manual.
The FCA was pleased to see firms using well-documented and up-to-date procedures for ending relationships and effectively off-boarding AR/IARs. However, bad practices included failing to monitor AR/IAR websites post-termination to remove references to the Principal firm and/or regulated activities and not notifying the FCA promptly.
The FCA encouraged Principal firms to review their findings and apply them to current practices, addressing any gaps in the three areas discussed. Firms outside the Credit Broking sector should also consider these updates, as they have broad applicability to various business models. However, these findings are just as relevant for ARs and firms seeking out potential Principal/AR relationships. ARs need to be confident that their Principal understands the FCA’s requirements and can support their ARs to achieve the best outcomes for them and their customers.
At Consumer Credit Compliance, we pride ourselves in the high level of support we provide to our ARs through our regulatory hosting service. If you are seeking a Principal firm or would like to know more about the support we provide to our network, contact us on 01423 613335 or email info@consumercreditcompliance.co.uk.
