September 2016
Here's the latest blog from Sandra Quinn - my fellow Director at The Compliance Foundation. Well worth the read if you are a FinTech Startup.
At
TCF we are asked regularly by would-be financial services firms and tech
start-ups, who are keen to get set up and operating at speed, about becoming an
Appointed Representative as an alternative to Full Authorisation by the
Financial Conduct Authority. We always
say that it can be an attractive option, that can help you get up and running
quickly, but that it does come with its own responsibilities and risks, that
are not always obvious to the would be Appointed Representative and that the
arrangement is not failsafe and can still lead firms into hot water with the
FCA.
The
FCA themselves also appear to be refocusing regulatory attention on the
operation of Appointed Representatives having just published a report on Principals and their Appointed Representatives in the General
Insurance sector,
https://www.fca.org.uk/news/tr16-06-principals-appointed-representatives-general-insurance-sector.
This report has lessons for anyone setting up a financial services business and
thinking of doing so using an Appointed Representative status. Below is our TCF “in a nutshell” view on the
option.
Providing
financial services in the UK requires authorisation by the relevant regulator –
often the FCA. An alternative to Full
Authorisation, for certain types of service, can be, usually for a fee, to seek
to become an “Appointed Representative” of an already ‘Fully’ authorised
financial services firm known as the “Principal”. To do this the Principal will need to have
the regulatory permissions required to sell and operate the Appointed
Representative’s proposed service or product. Under the arrangement the Principal will take
responsibility for ensuring that the compliance arrangements and performance of
the Appointed Representative are at the standard specified by the FCA and to
do this they are required to make regular compliance checks to satisfy themselves
about the Appointed Representative’s conduct and performance.
Some
firms sensibly enter into an Appointed Representative/Principal relationship
because of the nature of the business they plan to carry out, e.g. to be able
to sell and distribute a product provided by the Principal. Where
this symbiosis exists it can be a sensible plan and the level of compliance
support and engagement can often be at a suitable level as it is clearly in the
interests of the Principal to maintain a high level or risk their own business
and/or reputation.
However,
some Principals, have built their business models around the successful taking
on and managing of multiple Appointed Representatives from whom they generate
fees. Other Principals have business
models that provide an initial bed and breakfast arrangement, to enable firms
to get off the ground, on the proviso that they pay fees and/or purchase business
consultancy services to help them get fully authorised. Our experience suggests that when firms look
to become Appointed Representatives in these situations they need to proceed
carefully as all that glisters is often not gold and can be toxic. The lure of the promise of easy compliance
and a platform to operate are a heady mixture.
Some
firms tell us about Principals who have assured them that “compliance will be easy”
and have left them to “get on with it”, developing a reactive rather than
properly proactive relationship with them.
This has left them very vulnerable to FCA investigation as per below.
While
the FCA’s report applies to general insurers, it draws conclusions which anyone
considering seeking Appointed Representative status should consider as it
highlights failings in a number of areas in the firms they reviewed which are
potential risks in any Principal/Appointed Representative relationship and
which show the potential consequences, including:
- Lack of control and oversight from the Principal with some of the Principals reviewed not appearing to have understood the full extent of their obligations for ensuring their Appointed Representatives complied with regulatory requirements.
- Over half of the 15 Principal firms in the FCA’s sample could not consistently demonstrate that they had effective risk management and control frameworks to identify and manage the risks arising from the activities of their Appointed Representatives.
- Failure to understand the nature, scale and complexity of the risks arising from their Appointed Representatives’ activities and in particular the risk to customers with almost half of the Principal firms unable to demonstrate that they had understood.
- Examples of potential miss selling and customer detriment as a result of Appointed Representatives’ actions at a third of the Principal firms included in the review, with most of these issues not previously identified by the Principals. These cases included customers buying products they may not need, products they may not be eligible to claim under or customers not being provided with enough information to make an informed decision. In one case the FCA was satisfied that at the Appointed Representatives of one Principal firm there was significant evidence of miss selling leading to actual customer detriment.
As a result of these
findings the FCA is taking action including:
- Calling in Skilled Persons (essentially commissioning professional services firms) to review two firms – very expensive.
- Requiring two firms to stop selling services and or products – terminal.
- In effect prohibiting five firms from taking on new Appointed Representative.
- Considering the need for customer redress and compensation and whether further regulatory action in relation to the issues identified is required – also very expensive.
Our
advice is always, that for anyone considering becoming an Appointed
Representative, that firstly they ensure, that they themselves, have enough
regulatory understanding and compliance capability to keep their business
secure and compliant. In addition,
getting effective and compliant processes and policies in to a business at an
early stage can save huge amounts of money, time and energy at a later date as
they won’t need to be reengineered.
Secondly
ensure that they contract with a Principal that’s capable of providing the
right compliance support, because, while the Principal might take an umbrella
regulatory responsibility for a business, it’s still the businesses own
customers, reputation and future that need to be protected. The compliance regime offered by a Principal
should be disciplined and demanding – its in an Appointed Representative’s best
interests.
Thirdly
ensure that the Principal’s business ambitions and reputation align with that
of the Appointed representative. What
affects you can affect a Principal and what affects a Principal can affect
you. This is particularly important for
anyone considering being an Appointed Representative before seeking full
authorisation. Reputations matter with
the FCA.
In
practice we often find ourselves helping clients to redesign and ‘upgrade’
their business and compliance arrangements to be able to apply for full
authorisation. Some of this is
inevitable because an Appointed Representative can no longer rely on a
Principal to provide compliance services and the general responsibilities are
more extensive. But, while upgrading arrangements is entirely doable, we
recognise that the more a firm can use their existing arrangements as a
foundation, the more effective and the cheaper it can be.
In
summary we believe that the old addage about there being “no such thing as a
free lunch” applies to Principals and Appointed Representatives. Good compliance standards and a demanding
Principal who understands their responsibilities and applies them to a
conscientious Appointed Representative is good for both the businesses and the
regulators.
Reputations,
customers and your business are all your own.
