The Financial Conduct Authority (FCA) has found significant shortcomings in the control and oversight of appointed representatives (ARs) by their principal firms in the general insurance sector in its latest thematic review.

The regulator’s main concern is the material risk of customer detriment arising from the activities of appointed representatives that are not subject to appropriate control and oversight from their principal. Some of the firms did not appear 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 its 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.

The FCA also found that almost half of the principal firms in the sample could not demonstrate that they had understood the nature, scale and complexity of the risks arising from their appointed representatives’ activities and in particular the risk to customers.

The FCA has also found examples of potential mis-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. The poor customer outcomes identified 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. At the appointed representatives of one principal firm there was significant evidence of mis-selling leading to actual customer detriment.

As a result of the findings the FCA has taken early intervention actions in relation to five of the principal firms in the sample. This includes:

• The commissioning of two section 166 skilled person reviews to assess whether detriment has been suffered by customers from mis-selling and consider the adequacy of systems and controls;
• Asking two firms to cease sales activities;
• Agreeing the imposition of requirements on all five firms’ regulatory permissions to stop them taking on new appointed representatives;
• Considering the need for customer redress and whether further regulatory action in relation to the issues identified is required.

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.”

The FCA is also writing to CEOs of principal firms in the general insurance sector to remind them of its expectations and set out what actions firms should take to address the issues raised in the report. Further work will also be undertaken with some of the firms who were in the wider sample but not included in the detailed work.