The Financial Conduct Authority has publicly censured a Lloyds of London wholesale insurance and re-insurance broker and has also reached an agreement with the firm under which the London-based firm will pay £399,902 to disadvantaged customers. Had it not been for the evidence showing that the firm was experiencing financial hardship, it would also have been fined £958,100, or £670,600 with the 30% discount for early settlement being applied.

The issues identified by the FCA related to the firm’s oversight of six Appointed Representatives, who were selling extended warranty insurance policies to retail customers for goods such as satellite equipment or household appliances. The failings are said to have continued over a three-year period between February 2013 and March 2016.

The firm is said to have failed to consider the risks associated with entering the mainstream retail market in 2013, an area in which the firm had not previously been involved. Its oversight of the ARs was described by the FCA as “limited and ineffective.” The FCA adds that there were “no effective controls in place to identify and protect vulnerable customers who may have needed additional care and protection in their interaction with sales agents.”

More specific issues identified at the firm and its ARs included:

  • The sales script was not of sufficient quality to ensure information provided to customers was “clear, fair and not misleading”.
  • Moreover, adherence to the script by sales agents was poor
  • A number of customers who already had similar insurance in place were still sold insurance by the AR, often being advised to cancel their existing cover
  • The Principal firm did not monitor its ARs’ sales calls, except for a very limited number during twice-yearly site visits
  • The AR firms were allowed to investigate their own complaints, without input from the Principal firm

There were multiple deficiencies in the information provided to customers, including failing to:

  • Confirm customers were eligible for the policy
  • Complete all necessary disclosure before customer payment details were asked for
  • Communicate product benefits and exclusions
  • Inform customers of all available payment options

The FCA comments on “some customers purchasing insurance policies which they did not fully understand, or could not afford, or did not need.” Indeed, in 90% of the sales calls monitored by the FCA, there was a high risk that customers purchased a product that they did not understand or did not need. 98% of the calls breached FCA rules in some way.

The regulator believes that the firm’s actions breached two of the Principles for Business:

  • Principle 3- Management and control: a firm must take reasonable care to ensure that it has organised its affairs responsibly and effectively, with adequate risk management systems
  • Principle 6- Customers’ interests: a firm must pay due regard to the interests of its customers and treat them fairly

This case has also prompted the FCA to issue a general warning to all principal firms that use ARs, regardless of what products and services they might offer. It says it “is increasingly seeing more examples of misconduct, often stemming from Principals’ failure to oversee their Appointed Representatives appropriately.”

It adds that:

  • It is undertaking greater scrutiny of firms as they appoint ARs
  • It is pursuing a range of targeted supervision in high-risk sectors
  • It is considering whether rule changes may be required to reduce the risk of harm posed by ARs

Principal firms are, in the FCA’s eyes, 100% responsible for the actions of their ARs, and any compliance breaches at ARs are considered by the regulator to be breaches committed by the Principal firm. No Principal firm can afford to have the attitude described by the FCA in this Final Notice:

“The programme overwhelmingly relied on the ARs monitoring themselves with little input or challenge from [name of firm], meaning that [name of firm] was unaware if customers were treated fairly.”

Mark Steward, the Executive Director of Enforcement and Market Oversight at the FCA, said:

“Principal firms have a responsibility to oversee their Appointed Representatives and ensure they are carrying out regulated activities properly. Without adequate oversight, customers are at risk and, as this case shows, where that is the case, the FCA will take action against the Principal. [name of firm]’s oversight of its Appointed Representatives was inadequate and ineffective which created the risk that customers, including those who are vulnerable, might be sold products they did not really want or which did not meet their needs.”