The Financial Conduct Authority has fired a warning shot for general insurance firms operating as principals for appointed representatives.

It comes after it reviewed a sample of principals and found half had shortcomings in the ways they supervise and manage the appointed representatives they’re responsible for.

Providers of GAP and other vehicle-related insurance were among the sample.

In a thematic review published today, the FCA points out that a principal firm has regulatory responsibility for the appointed representative and generally, in the regulatory context, anything that the appointed representative has done or omitted to do is treated as having been done or omitted to be done by the principal firm itself.

The FCA’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, it said.

More than 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.

Significant evidence of mis-selling

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, which it has declined to identify publicly.

These actions included 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, and considering the need for customer redress and whether further regulatory action in relation to the issues identified is required.

Jonathan Davidson, the FCA's director of supervision, retail and authorisations, 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 chief executives 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.