Insight on: Regulatory

Monitoring and reporting on appointed representatives

In the second of two articles on Appointed Representatives, partner Tim Goodger considers changes impacting the appointed representative regime for insurance. 

The Financial Conduct Authority (FCA) is focusing on the under-belly of the insurance intermediary market, the world of appointed representatives (ARs). By doing so, it addresses the perception that this aspect of the insurance regulatory landscape is somehow softer and as such it can be an advantage to carry on regulated activities as an AR rather than seek Part 4A permissions pursuant to FSMA 2000. Rightly, the FCA is focusing on a tightening of a principal’s duties on making an application for a person or entity to be an AR and also on reporting obligations.

A renewed focus on the application process

The FCA is focusing on the application process and the primary reason that a principal wishes to appoint an AR as well as the nature of the regulated activities that the AR will be permitted to carry out. For example, a principal’s appointment should not be because the principal believes it will generate greater revenue for it.

The FCA makes clear that it will challenge an applicant’ principal’s due diligence, including an incomplete assessment of a proposed AR. The FCA states that it will view non-disclosure very seriously and it may view it as evidence of dishonesty or lack of integrity.

The applicant’ due diligence on a proposed AR should include the overall background and so too the rationale for appointing the proposed AR. The FCA will be concerned to know whether the proposed AR has been an AR previously and why that prior relationship terminated.

The FCA expects a principal to review and understand the proposed AR’s business plan. Therefore, the principal will need to have properly assessed estimated revenue from both regulated and any non-regulated activities in year one following the appointment, as well as projections for subsequent years of trading.  Naturally, an AR likely would want that to be subject of a non-disclosure and/or confidentiality agreement between the proposed principal and the proposed AR, but the principal should ensure there is a proviso that it is entitled to disclose matters to the FCA and other regulators or governmental organisations.

The ability to demonstrate effective governance and controls is key to becoming a principal.  ARs can present a risk of harm particularly if the principal becomes dependent on an AR for income or an AR’s business in the UK grows and the principal cannot provide adequate oversight. It appears the FCA will be looking at issues like these.

A principal must focus also on staffing of the AR, ensuring competent people are involved with the AR. A sub-set of this element of due diligence is whether the AR’s staff have sufficient and relevant experience to undertake proposed roles. In this regard, the AR may need to second or contract in personnel to undertake the proposed regulated  activities. Likely this will entail the principal scrutinising the rationale for the arrangement. Identifying gaps in competency and ensuring training as remedial action will be important.

It is better that a principal explains why a candidate is suitable and how the principal will ensure effective supervision is in place, rather than not address it. If an individual’s or company’s conduct is the subject of ongoing litigation, or where there is a pending disciplinary hearing or court decision, then that also needs to be disclosed. If a principal uncovers adverse information then that must be disclosed.

The FCA is focusing also not only on the extent of the due diligence that a principal undertakes, but also its ability to monitor its representatives and comply with its reporting obligations. For example, a principal likely will find it more difficult to monitor a class of business with which it is not familiar e.g. retail, rather than say commercial with which the principal might be familiar. The principal should be aware, perhaps inevitably, the provision of services to retail clients will attract a greater risk factor and will require greater monitoring by the principal.

Overseas ARs

As mentioned in a previous article, the FCA appears to be focused on Overseas ARs. It has identified failings in applications. It considers it a failing by an applicant (principal) not to disclose that a proposed AR has previously applied for direct authorisation for Part 4A permissions and if it had been withdrawn subsequently because an entity could not meet certain regulatory standards. Therefore an applicant principal needs to be clear how a proposed AR may have enhanced its business model or systems and controls to address the FCA’s concerns.

Wind-down plans

An important element of the application is also that the principal is able to show and know what steps are in place for the AR to conduct an orderly wind-down of the AR’s business, should that be necessary. This is an area of increasing exposure for the re/insurance market, particularly in the context of ARs acting as coverholders for re/insurers. There can be real issues for the customers and the market if say a delegated authority is withdrawn but the necessary wind-down plans either have not been written or have been poorly drafted  or have not been implemented correctly.

Principal’s reporting obligations

As of 1 December 2023, all principal firms will need to report to the FCA regarding the ARs they have appointed. This includes a return in respect of each AR with an annual Firm Details Attestation (FDA), as well as providing regular data using Form REP 205.

The FDA entails principals confirming their AR’s details, including whether each AR has more than one principal and whether their detail remains unchanged. Principals must complete FDAs within 60 business days of the principal firm’s Accounting Referencing Date (ARD) after 30 November 2023. The information required will be for the 12 months prior to the applicable ARD. For example, if a firm’s ARD is 31 December 2023, the relevant reporting period will be 1 January 2023 to 31 December 2023. And a failure to report to the FCA will result in a £250 levy and possible enforcement action.

The Rep 205 enables the FCA to collect information from principal firms about their ARs (including IARs) annually for the revenue generated (as opposed to profit) and the complaints (as defined in the FCA’s Glossary) against the relevant AR, which either were opened and/or closed, during the relevant reporting period and which relate to the activity carried on by that AR or IAR on behalf of the reporting principal. This applies even if the relationship between the principal and the AR has terminated during the relevant reporting period.

The principal must report on the AR’s regulated business revenue or income figure. This should be net of any payments or transfers to the principal i.e. deducted from the income received.  However, payments to the principal for services provided by the principal should not be deducted from the revenue figure.

If nil revenue or income is generated from the regulated activities, then the principal will need to explain why that is the case. Inevitably, that will lead to a line of enquiry by the FCA as to why the AR has not carried on the relevant regulated activities for some time and also whether it ought to be an AR going forward. In reality, the principal must consider if the AR arrangement remains suitable, or whether it should be terminated. Principals might consider reviewing their AR agreements generally and, in particular, the termination provisions.

There is a requirement also on the principal to provide non-regulated revenue for ARs. However, this is not for IARs provided the IAR had not changed its status from an AR to an IAR in the relevant reporting period.

Expanding  ARs 

It is noteworthy that the FCA’s view historically has been that any firm that wishes to expand its business in the UK ought to be authorised rather than be an AR. Arguably, if ARs reach a certain size e.g. by revenue or gross premium income written, then making them transition to either being an intermediary (if they are undertaking insurance or reinsurance intermediation) or to be an insurer or reinsurer ought to reduce the risk of harm.

The sensible course would appear to be that the FCA stipulates to ARs that if they continue to expand and that is their model, then their path to authorisation ought to be part of their business plan. In turn, that could be monitored by the principal and the FCA as part of the on-going reporting process.

Timothy Goodger , Partner specialising in insurance and reinsurance / December 2023

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