FCA Identifies Good and Bad Practice in Oversight of ARs by Principals

In April 2024, the FCA published its findings arising from their review of Appointed Representatives (ARs) and Introducer Appointed Representatives (IARs) who undertake Credit Broking. The findings highlight both good and bad practices of Principal firms in relation to the appointment, monitoring, and termination of AR relationships.

Since the implementation of the new Appointed Representatives regime on 8 December 2022, the FCA has continued to assess how Principal firms oversee and monitor their ARs. The regulator’s increased interest in ARs is partly due to high levels of complaints and supervisory cases against Principals of ARs, which account for up to 400% more cases than directly authorised firms, according to the FCA.

Whilst the FCA’s report covers Principal firms with a credit broking permission, the report is relevant and of value to all Principal firms as the FCA has emphasised that it will act where it identifies firms have an inadequate oversight of their ARs.

FCA expectations, good and bad practice guidance

The FCA expects Principal firms to have appropriate, proportionate, and robust procedures, systems, and controls to ensure that they conduct appropriate due diligence checks on ARs, both on initial appointment, and an ongoing basis.

Whilst the FCA acknowledges that Principal firms struggle with ‘the Gateway’ when appointing ARs, it emphasises that this is not a ‘tick-box’ exercise and additional regulatory scrutiny at the appointment stage is here to stay. Principal firms should expect additional challenge, particularly where AR’s Approved Persons are based outside of the UK.

Initial appointment of ARs

Good practice

Regarding the initial appointment of ARs, the FCA identified several examples of good practice. Principal firms that performed well demonstrated a thorough understanding of the risks and regulatory requirements associated with ARs. They had robust on-boarding procedures, which included comprehensive quality assurance and auditing processes. These firms treated FCA rules as a minimum standard, creating rigorous procedures that incorporated risk scoring systems and clear governance processes. They also undertook extensive due diligence, including onsite visits, financial reviews, and anti-money laundering checks.

Areas for improvement

The FCA also found areas needing improvement in the initial appointment process. Some Principal firms had an inadequate understanding of the full requirements for appointing ARs and lacked sufficient systems and controls for conducting due diligence. These firms often had outdated procedures and failed to perform necessary checks, such as criminal and credit checks or thorough Companies House checks. Additionally, some firms lacked the resources to oversee large numbers of IARs effectively and had a poor understanding of the business model risks.

Ongoing monitoring of ARs

Good Practice

The FCA noted good practice in Principal firms with robust systems and controls to monitor their ARs, who could demonstrate a variety of methods by which they could satisfy themselves that their ARs were compliant with relevant rules and regulations. The regulator praised monitoring procedures which focused on identifying and addressing potential consumer harm to improve future procedures.

Firms demonstrating good practice had dedicated oversight staff, whose roles favoured a compliance function as opposed to a relationship management function, and a clear structure around responsibilities. Whilst a higher number of oversight staff per AR didn’t always correlate to better oversight, the experience and knowledge of individuals involved did.
The FCA praised firms who monitored AR/IAR's financial position on an ongoing basis and had control over relevant sections of AR/IAR websites, with the ability to restrict or block access to a firms’ systems in the event of a failure to comply with the terms of an AR agreement.

Areas for improvements

Firms with poor systems and controls could not demonstrate effective, ongoing oversight of their ARs and some did not have adequate resources to effectively monitor the number of ARs they had or planned to have. For instance, some firms could not adequately demonstrate how they were monitoring AR activities to ensure they did not pose an undue risk of consumer harm, and or were not monitoring AR/IAR websites to ensure compliant financial promotions.

The FCA also found a potential conflict of interest in staff who were maintaining and developing commercial relationships with ARs, whilst also holding the responsibility for compliance functions involving the ongoing monitoring of ARs, identifying a risk that the commercial interests and relationships of such staff may prevent them fulfilling their compliance obligations independently and impartially.

Ending AR relationships

Good Practice

The FCA emphasises that it wants Principal firms to be clear on when, and how, to end an AR relationship in line with the requirements in the FCA Handbook (SUP 12.8) and praised firms with well-documented and up-to-date procedures to end AR/IAR relationships and effectively off-board.

Areas of improvement

Firms not monitoring the AR/IAR's websites post-termination to ensure references to the principal firm and regulated activities were removed, and not providing a timely notification to the FCA.

Next steps for Principals & the FCA

Looking ahead, the FCA will continue its sector-specific reviews and monitor data from Principal firms’ REP025 returns on RegData. The FCA emphasises that due diligence is an ongoing responsibility and expects Principal firms to maintain robust oversight of their ARs. The regulator has made it clear that it will take action against firms that fail to ensure adequate oversight.

Principal firms, including those outside the Credit Broking sector, should review and strengthen their on-boarding, monitoring, and off-boarding processes. They must ensure that their procedures are comprehensive and up-to-date, allocate sufficient resources for effective oversight, and address any conflicts of interest that may hinder compliance functions. By aligning their practices with the FCA’s findings and guidance, Principal firms can enhance their oversight of ARs and mitigate the risk of regulatory breaches.