Guest blog: Principal Concern - Appointed representative agreements to come under the spotlight

Later this year, the FCA will publish its thematic review of appointed representatives (ARs). Firms will be keeping an ear to the ground to ensure their conduct does not expose them to potential FCA action, following recent section 166 reviews in this area.

From our work with both principal firms and ARs, we have pinpointed some key regulatory concerns that firms should consider when reviewing their approach to ARs.

Does your agreement stand up to scrutiny?

Is the partnership a suitable match?

A principal firm should ensure that the culture of the prospective AR matches up to expectations both prior to any business relationship and, indeed, on an ongoing basis.

The steps they take (with the guidance of the principal firm) to treat customers fairly; how they accommodate vulnerability; their complaints handling policy; their ‘tone from the top’; their governance arrangements – all of these factors contribute to whether a partnership between firms is feasible.

There is something to be said for prospective ARs doing their research on the principal firm, too. Despite the possible need for an agreement to be reached in a timely manner, firms looking to become ARs would be wise to do their homework.

Both parties can lessen the risk of issues within their agreements by:

• Conducting initial due diligence to ensure a comprehensive understanding of how the AR operates and whether it is the right fit for your business
• Understanding their own – and each other’s – risk appetites. How do they match up? Does your AR understand and incorporate your appetite for risk into their decision making process?
• Understanding and discussing business models and strategy. Is the partnership compatible with ensuring good outcomes for end customers?
• Reviewing both firms’ governance models. How will decisions be made, will they be effective and how will both firms ensure transparency?
• Examining the firm’s culture – for example, how will the sales process be incentivised? Firms should ensure they achieve commercial goals while delivering the fair treatment of customers
• Do prospective ARs have relationships with other networks? Determining the nature of these relationships will be beneficial in the decision making process, as it gives further insight into the activity of the firm (and any associated risks)

Have you made your expectations clear?

Both the principal and the AR must ensure they place the customer at the heart of their business model. If, for example, the AR has come under regulatory scrutiny, neither party will be absolved of responsibility, and any regulatory action will likely impact both firms. Just as the FCA can walk into the principal firm’s office at any time, the same is true for ARs.

This means that principal firms must:

• Be explicit over their customers’ desired outcomes and risk appetite
• Decide upon (and convey) their methods for monitoring advice, products, processes and the relationship generally, including setting out firm specific KPIs
• Document this activity in order to be able to evidence it later

What MI passes between parties?

Management information is a vital tool in overseeing the relationship between principals and ARs but, if it isn’t focused on the correct data and information, it can serve to cloud the activity of both parties and stop issues from being discovered. What does your management information look like, and how deeply does it delve into the compliance of ARs? Do board packs provide senior stakeholders with a clear view of regulatory risks and real performance of ARs?

Principal firms must:

• Establish a comprehensive MI pack focused on key business and customer risks including areas of regulatory focus
• Ensure that relevant data points and reported MI are consistent, actionable and relevant
• Think about the measures they might need to take if the relationship is underperforming with regards to customer outcomes (or any other regulatory issues).  Are the measures forward-looking and can trends be spotted? How do the measures link to the principal’s strategy, culture and risk management framework?
• Ensure that MI received is timely and that there is sufficient coverage across the whole customer life cycle. Ultimately, MI should allow for and support open challenge and communication between the principal and the AR

What does ongoing monitoring look like?

Whilst due diligence is important at the outset, robust yet proportionate ongoing monitoring is crucial to ensure positive outcomes are being achieved and the timely identification of risks and issues. Being able to evidence your ongoing monitoring is also extremely important when it comes to possible regulatory scrutiny.

Principal firms should:

• Illustrate to their AR how the firm’s initial expectations will translate to ongoing monitoring – if you’ve conveyed the desired outcomes, what indicators will you look at to measure whether standards are maintained? Will measuring these indicators help you monitor your ARs holistically? Monitoring should be meaningful and should not simply fulfil ‘tick box’ criteria
• Ensure they have the regulatory knowledge required to spot new risks. Not only is regulatory competence important here for both principals and ARs, but also the way firms escalate and examine concerns
• Establish a schedule for ongoing monitoring - how often will you examine performance, who will examine it and how does this tie into your firm’s risk management processes?
• Additionally, establish how your ARs will ensure they operate within the permissions they have been granted. How regularly is this reviewed?

The key to a healthy relationship…

…is – without doubt – effective communication, constructive challenge and ongoing oversight. With regulatory responsibility falling on both sides of the AR agreement, and with this area subject to ongoing FCA thematic work, collaborating successfully to achieve good customer outcomes is the top priority.

It might be that your existing ARs must get used to a slightly more ‘intrusive’ method of ongoing monitoring, or are met with more detailed questioning at the point of forming agreements. It should be recognised that this is directly in the interests of protecting both firms and consumers.

Matt Drage will be giving a keynote speech at our event on 23 June 2016: GI Distribution Chains: Regulatory expectations and market developments.