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Alan Hughes: Keeping on top of AR risk

The FCA has its eye on principal firms’ management of their authorised representatives

Since the introduction of the pension freedoms, in particular, the FCA has been increasingly concerned about the roles of unregulated introducers working with authorised firms to generate business.

This is with some justification, as there have been examples where the use of such introducers has led to unsuitable investment decisions for consumers.

On 3 November, the FCA issued an alert aimed at firms with appointed representatives, as a follow-up to one issued in August 2016 on introducers.

The latest alert does little more than extend the message to principal firms with ARs. However, such firms should bear in mind the regulator has released it because it sees them not paying enough attention to the issue.

Principal firms should take a look at their systems to make sure they are addressing the key points in the alert effectively. If they are not, and the FCA carries out further thematic work in this area, it will have little patience.

Taking a step back, the starting position is that principal firms are responsible for everything their ARs do. It is therefore down to the principal firm to ensure their AR firms and the way they operate their businesses do not present an unacceptable level of risk to clients.

At the most simplistic level, a firm could say that, as long as they monitor the advice given by their AR firms properly, risk is managed effectively.

However, the FCA will expect firms to take a more sophisticated approach than that by trying to identify potential risk earlier in the process than when AR advice is reviewed.

Principals must be able to identify trends in the types of business being submitted by ARs, which a simple analysis of standard management information will achieve. But a sensible principal should also be seeking to identify and monitor any introducers its ARs are working with. The FCA is likely to expect them to record this information going forward. While principals may not be subject to a rule specifically requiring this, it is all about outcomes and FCA principles.

It would also be sensible for principals to ensure that at least some basic due diligence is carried out on introducers. Just looking at publicly available information at Companies House on the shareholders of introducers can often reveal “interesting” links between them and other third parties, for example.

In addition, if the use of an introducer results in a spike in particular types of business, especially any type of business viewed as being higher risk, then this should trigger further investigation by the principal firm. There may be perfectly good reasons why a particular introducer introduces a particular type of business, but principals must interrogate that issue.

It goes without saying that all this needs to be written down and recorded contemporaneously by the principal. Where risk is identified, the principal needs to show action has been taken to mitigate it.

There has always been an inherent risk in appointing ARs; the principal takes primary responsibility for everything the AR does. So this is actually a very useful heads up from the FCA. The way to deal with risk is to identify it early.

AR agreements

One other way principals can seek to address their risk is in their AR agreements. I see a wide selection of AR agreements come across my desk and I am often surprised that those of some relatively large networks do not deal with some fairly basic issues.

The purpose of the AR agreement is to set out clearly the relationship between the principal and the AR. It is the most important contract in a network, in particular, as it will be the first port of call if an AR’s activities have resulted in the principal firm suffering significant loss.

With this in mind, working hard at putting a robust agreement in place is time and money well spent. It often only takes one claim to recoup that outlay.

And it is worth pointing out that “robust” does not have to mean unfair or one-sided. It is often just a case of achieving clarity between the parties about who is responsible for what, particularly when something goes wrong.

So some further food for thought from the FCA. I think it can be said that this is not a case of goalposts being moved or retrospective regulation. Firms can reduce their risk by taking on board this advice.

Alan Hughes is partner at Foot Anstey LLP



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  1. sounds great are you a financial adviser?

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