Context
The FCA has published a review report setting out good practice and areas for improvement it has seen in its supervisory work related to inactive ARs and Introducer ARs (IARs). The FCA reviewed 14 Principal firms.
The review web page explains that there are a range of possible reasons why ARs do not carry out regulated activities. Where this is the case, Principal firms still need to have effective oversight of their ARs and cannot rely on transaction oversight as a source of information.
An unexplained lack of reported regulated activity is an indicator of weaknesses in Principals’ governance, monitoring and oversight, and risk management of its ARs/IARs. Where such weaknesses exist, there is an increased risk of consumers being misled and suffering harm. This builds on previous publications including PS22/05, PS22/11 and the FCA’s 2023 publication on Improving the Appointed Representative regime through greater use of data.
Key points to note and next actions
The FCA expects Principal firms to:
- Consider AR arrangements where ARs or IARs are not routinely carrying out regulated activities and reflect on whether oversight, monitoring and governance practices remain appropriate.
- Provide accurate and clear explanations in REP025 regulatory returns (column F) where ARs have not carried out regulated activities during the specific reporting period. Do not rely on unclear internal terminology. Explain the reasons for inactivity in simple terms and do not rely on statements such as ‘not trading’ or ‘not introduced business during this period’ as the explanation for AR inactivity.
- Take timely action to terminate AR/IAR relationships where they are no longer appropriate and notify the FCA when the status of the relationship changes.
The review report addresses the following issues, setting out examples of good practice, areas for improvement, and case study examples for each:
- Lack of AR regulated revenue reported to the FCA (commentary includes secondary regulated activity such as secondary credit brokers and funeral directors arranging funeral plans).
- Lack of engagement with inactive AR.
- Insufficiently monitoring consumer-facing materials.
- AR agreements needing to meet regulatory requirements.
Next steps for firms:
The FCA’s engagement with the 14 Principal firms led to ‘positive change’ at seven of them, with several ARs terminated (“offboarded”) and Principals strengthening their monitoring arrangements. Principals should:
- Actively and appropriately engage with their ARs through oversight, and use robust data quality, and governance, including additional measures when an AR is inactive.
- Accurately report revenue generated by the AR and any reasons for periods of inactivity through the REP025 regulatory return.
- Monitor the appropriateness of their AR relationships and take timely steps to ensure the Register remains up to date and the principal’s risks are mitigated.