The Financial Conduct Authority (FCA) has published a thematic review in which it reveals its concerns over the way principal firms in the general insurance sector are supervising their appointed representatives (ARs).
The FCA assessed 15 firms , and says that the majority of these could not demonstrate they had effective risk management systems in place concerning their ARs.
Almost half of the 15 firms could not show that they had understood the risks posed by their AR’s activities, and consequently could not demonstrate that they appreciated the risks to their customers. Here, areas of concern identified by the FCA included: the effectiveness of compliance monitoring of the ARs, whether the ARs were sufficiently solvent, and whether effective contracts were in place between the principals and the ARs.
At five of the 15 firms the failings are sufficiently serious to require the FCA to take action. All five firms have been prevented from taking on new ARs; two firms have been asked to stop selling insurance; and two firms will be subject to a Section 166 review to assess the effectiveness of their systems and controls, and whether mis-selling and customer detriment has occurred.
Some of the reports in the mainstream media concerning the review have chosen to concentrate on the possibility of a new mis-selling scandal concerning warranty insurance. This insurance was often sold by retail assistants in stores, who were acting as appointed representatives of insurers, and who did not have financial services experience and had not received adequate training. This certainly has echoes of the way much of the store card payment protection insurance was mis-sold – the review makes reference to warranty insurance having been sold to customers who could not claim on it, and to the insurance being sold without the customer being provided with information about exclusions and other key product features.
Each of the 15 firms visited had more than 50 ARs on average, so it would have been an onerous task to effectively monitor them all, yet under FCA rules that is exactly what the firms in question were required to do. One firm admitted to the regulator that it had not understood the full range of activities its AR was carrying out, and that it lacked the resources to supervise all of these activities anyway.
Jonathan Davidson, director of supervision – retail and authorisations at the FCA said:
“While some principals did have a good understanding of their appointed representatives’ activities and their obligations as principal firms, we found widespread examples of poor practices across the sector. In many cases firms were simply failing to understand and manage the risks arising from their appointed representatives’ activities.
“General insurance is a large and important sector and we are concerned about the potential for customer detriment arising from the lack of oversight of appointed representatives. All principal firms need to consider these findings and look again at their practices.”
Since the publication of the review, the regulator has written a ‘Dear CEO’ letter to the chief executives of principal firms in the general insurance sector, summarising the findings of the review and reminding firms that they will be held responsible for any failings identified with their AR’s activities. The letter reads:
“We treat an act or omission of the appointed representative, in respect of the business for which the principal has accepted responsibility, as the act or omission of the principal itself.”
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.