2nd July 2019

Principal Firms and their Appointed Representatives are under the regulatory spotlight

The symbiotic relationship between appointed representatives (ARs) and their Principal firm has proved a successful regulatory alliance for a number of years. The model has allowed smaller companies to carry out regulated activities whilst utilising the expertise of regulatory umbrella companies to ensure that they adhere to the Financial Conduct Authority’s (FCA’s) requirements. Thus, ARs avoid large upfront regulatory costs, achieve a faster route to market and are provided with the freedom to concentrate on their own core business activities under the oversight of their Principal firm.

As a result, a growing number of umbrella companies have emerged that specialise in providing the regulatory hosting of hundreds of ARs in exchange for a monthly fee. The growth in this operating model has brought with it increased scrutiny from the FCA in recent years, with the focus on ensuring that Principal firms truly understand their AR’s activities and are diligent and thorough in their regulatory oversight responsibilities.

A successful business model is not without its pitfalls

Being ultimately responsible for the compliance of multiple ARs comes with risks. Even though most ARs purchase their own insurance policies, Principal firms can still be drawn into disputes involving their ARs (an example being if the AR has acted outside its authorisation). Claims are being made against not only the AR, but also the Principal firm, giving claimants two avenues to compensation. Allegations, however spurious, can result in significant defence costs for both parties even if there is no wrongdoing.

There is also a business risk to ARs as they are beholden to the regulatory permissions of their Principal. So, in the event of the Principal firm having their permissions suspended by the FCA, the ARs would have to cease all regulated activity until the Principal’s permissions were reinstated. Alternatively, the AR would need to engage a new Principal firm. Either way, the result is an interruption to trading that could last for many months.

The FCA are intensifying their focus

The insurance market is increasingly aware that the FCA has taken a proactive stance in reviewing this relationship. Insurers are looking for Principal firms to demonstrate that they are on top of regulatory oversight and any changes to the business activities of their ARs by way of detailed procedures.

Protean Risk have seen an increase in the number of Section 166 investigations issued by the FCA, which results in ‘skilled person reviews’. These reviews investigate perceived weaknesses in compliance, internal procedures, potential mis-selling and poor corporate governance. The Principal firm would typically have to foot the bill for such investigations with costs for relatively small firms often running into hundreds of thousands of pounds. Not only are these investigations costly, but they can also result in a significant outlay in management time and FCA permissions being suspended, which may in turn cause significant financial damage and serious reputational damage.

The best solution is to be proactive
  • Make sure you have the right insurance and the right broker: Check your policy provides cover for regulatory and investigation costs, on both your Professional Indemnity (PI) and Directors’ & Officers’ (D&O) Liability policies, and that skilled person reviews are included within the cover. It’s important to speak to an expert broker who has detailed knowledge of the policy wording required for your business activities, including what you’re insured for and any exclusions. Your broker should be able to articulate any changes to the policy wording, or higher excesses that may affect your policy.
  • Keep your agreements up to date: Whether your firm is the Principal or the AR – make sure a copy of the agreement between both parties is up to date and reflects any changes in business activity that has happened over time. Providing a copy of the most recent agreement to your broker is useful so they can provide you with the appropriate insurance wording and accurate quotations.
  • Start the renewal process early: As a rule of thumb, you should give yourself at least 90 days before your insurance policy expires to start preparing for your insurance renewal. Insurers will want to know details such as:
    • Any changes or developments in your business activities since last renewal
    • What enhanced compliance procedures/improvements in Risk Management you have put in place
    • Any internal/external reviews undertaken on the business and whether the suggested improvements have been made
    • Your revenue for the last financial year and your forecasted revenue for the current year
    • What your Standard Terms of Engagement are and whether you utilise any disclaimers or impose limitations on your liability
  • Presentation is key: The above points emphasise that providing your broker with clear and detailed information in good time will help when presenting your business to insurers and increase the likelihood of a positive outcome. 

Protean Risk are a specialist broker for Financial Services companies and arrange cover for a large number of Principal firms and ARs. We can discuss with you any new market developments or trends that may affect the cost of your insurance, as well as your level of protection.

We have worked to understand the nuances of the insurance market for these types of firms and partnered with insurers who will offer attractive rates for suitable cover. Whether your purchasing decision is driven by a platform requirement or a desire to protect your business, our team has experience in helping many firms in this area with bespoke insurance solutions.

You can find out more by visiting our Appointed Representatives page and feel free to get in touch with a member of our team.

Appointed Representatives