Posted: 17th August 2017

Historically, there has been concern in areas of the financial services industry that appointed representative (AR) agreements may not be delivering consistently fair outcomes to customers.

In any regulated industry, firms must ensure commercial decisions are complemented by adherence to regulatory requirements and a genuine interest in customer outcomes. In recent years, this has been shaped into the commonly referred to ‘risk-based approach’, where the areas of greatest customer risk should be assigned as the greatest priority for firms.

Of course, this isn’t to say insurance firms’ goals and aspirations aren’t aligned to the needs of their customers; this is the foundation of any customer-centric business. However, with many potential factors governing commercial decisions (especially so within AR agreements), firms need to have a clear view of the implications of these decisions on customer outcomes, reacting decisively when issues are identified.

So, what patterns have been observed by the regulator in relation to the outcomes typically being delivered by AR agreements?

The regulatory view

A key observation of the FCA’s Thematic Review 16 / 06 (and subsequent supervisory work) was cultural; it was the view of the regulator that some firms were entering into AR arrangements that resulted in commercial benefits, but paid insufficient attention to the risks that might face them or their customers as a result.

There are a number of inherent risks which served to shape the FCA’s view:

  • Insurance products can be complex, so need to be explained to customers in a way that is fair, clear and not misleading – meaning an AR selling insurance products must have a clear view of the key values the principal firm holds, as well as the associated regulatory requirements
  • Selling insurance is often not the core business of ARs, (e.g. vets, travel agents, dentists or car dealers), so comprehensive training from the principal is key in avoiding customer detriment issues crystallising
  • Without monitoring, the principal firm has no way of knowing whether AR staff are meeting the regulatory requirements the principal and the AR are both subject to

The FCA asserts that any activity performed or neglected to be performed by an AR “will be treated as having been done or omitted to be done by the firm (principal)” (SUP 12.3.1 G).

The overarching intention is that principal firms “demonstrate that customers buying insurance products from their ARs are no less likely to receive fair outcomes than if they had bought the product from the principal itself” (FCA).

How can principal firms and ARs set themselves up for success in light of these key assertions?

Three key areas requiring attention

We can highlight the key areas for firms’ attention by looking directly at the FCA’s findings:

1.The need for ARs to be part of ongoing risk assessment

The FCA’s findings:

Many principal firms could not show that they had considered the risks of prospective relationships with Appointed Representatives (ARs).

FCA expectations:

Principals should assess how appointing ARs would impact their business and have appropriate frameworks in place to manage the risks arising from their ARs’ activities.

Considerations for firms:

  • Does the internal culture of the prospective AR align with that of the principal? Is the culture conducive to open conversations between the firms about compliance and customer outcomes?
  • Are you confident the prospective AR understands your expectations of how to deliver fair outcomes to customers?
  • Is the prospective AR sufficiently resourced to deliver on your expectations?

2.Understanding obligations

The FCA’s findings:

Many principal firms did not seem to understand the extent of their regulatory responsibilities for their ARs’ activities – the actions of the AR are treated as actions of the principal.

FCA expectations:

Principals should ensure ARs are solvent and suitable, and put in place appropriate contractual arrangements which provide a basis for effective supervision.

Considerations for firms:

  • Does your contract with the AR clearly outline your regulatory obligations? How the AR is expected deliver on these?
  • Does it articulate arrangements for ongoing monitoring of standards, provision of management information (MI) and effective governance arrangements?

3.Oversight and control

The FCA’s findings:

Most of the principals could not consistently demonstrate that they had appropriate oversight or effective control of their ARs’ regulated activities.

FCA expectations:

Principals should have adequate resources to effectively control and monitor their ARs, and to enforce compliance with relevant rules, including PRIN and ICOBS.

Considerations for firms:

  • Is the AR sufficiently resourced to appropriately train staff to understand the product they are selling or administering on behalf of the AR?
  • Does the AR have the capacity and expertise to undertake its own quality checking - if not, can a compliant arrangement be put in place?
  • Does the MI you are provided with enable you to develop an effective risk-based approach to sampling?

Asking the fundamental questions of prospective or existing agreements

Moving forward, principals’ oversight of their ARs will remain a focus of the FCA’s supervisory work, suggesting a determination on the regulator’s part to correct poor practice in the market.

To make the general insurance market work well for consumers, principal firms must be prepared to put controls in place in order to understand the risks of dealing with ARs, and be able to demonstrate that the impact of any deal on customers has been considered. Should the principal have concerns about either party’s ability to implement and maintain these controls, they should be prepared to walk away from a proposed deal.

As well as this, the fundamental question to be asked by principal firms of their existing ARs is: “are we confident the AR is consistently representing our product in a way that is fair, clear and not misleading?”. If the answer to this question is no, or cannot be determined, then a principal firm is likely to struggle to demonstrate that their agreements are set up to deliver good customer outcomes.

Whether firms are presiding over existing agreements, or there is a potential agreement on the table, the most important aspect of the arrangement from a regulatory point of view is customers’ access to clearly explained products that are appropriate for their needs. Firms presiding over AR agreements must keep this customer centric principle front-of-mind from the outset and through the entire life of the agreement.

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