What does the FCA expect on introducers and third parties?

Simon Collins

The interaction of all parties in the fair treatment of customers remains centre stage, and maintaining a good reputation should be at the forefront of advisers’ minds.

Reliance on others is permissible as indicated by the Conduct of Business rules. However, the FCA continues to focus on the governance arrangements in place to manage the activities and impact on customers of third parties.

Its primary focus is to ensure the customer receives a fair outcome regardless of a firm’s operational arrangements or the number of other firms involved in the “journey”.

While the systems and controls requirements regarding outsourcing and third party relationships are generally well known and understood by the industry, the expectations of the FCA in relation to things such as service arrangements or introduction of business are more opaque.

Firms have been seeking further clarification through documents such as the responsibilities of providers and distributors in the fair treatment of customers.

We have seen a number a firms put in place proportionate arrangements for governance, whether the third party is an FCA regulated entity or not. Our primary observation is that firms must assess the arrangements in place as well as the potential for a poor customer outcome if they were not to work as intended.

The key pillars of a good governance arrangement for third parties are as follows:

  • Clarity of roles and expectations
  • Detailed due diligence and on-boarding of third parties
  • Proportionate monitoring (routine and thematic) of third party activities that impact on customers and regulatory obligations
  • Enhanced mechanisms for training provision of appropriate information for third parties (product and operational information)
  • Defined and workable arrangements for ceasing a relationship with a third party

The recent FCA statement regarding introduced business explains that an authorised firm accepting business from an introducer must meet its regulatory requirements. If customers are given unsuitable advice by an introducer, the authorised firm may be held responsible for this and be subject to regulatory action.

The FCA is concerned at the increase it has seen in cases in which the introducer has an inappropriate influence on how the authorised firm carries out its business; in particular, where the introducer influences the final investment choice.

The FCA also has concerns where the authorised firm delegates regulated activities, for example, by outsourcing their processes to unauthorised entities or to other authorised firms that do not have the relevant permissions.  The concerns relate to the core of customer treatment and further the alignment of culture between the firm and its third parties.

The regulator has set out the steps firms should undertake to ensure their relationships with introducers and lead generators meet its expectations. These include, unsurprisingly, robust due diligence and vetting procedures to ensure the introductions have been sourced legitimately, and adequate systems and controls to demonstrate full and complete ownership of the advice provided.

Unfortunately, getting this wrong may result in regulatory challenge, possible censure, fines and reputational damage, as we have seen. Senior individuals within a firm may also be challenged personally, particularly in relation to the forthcoming senior managers regime roll out to all authorised firms in 2018.

And what about the outcomes for clients? Significant remediation programmes if the issues are systemic? These are some of the risks that will be swept up into the wider governance aspect of a firm.

How easy is it to assume long-standing relationships are working simply because they are long-standing? There is often more risk that goes unchallenged on legacy relationships and service provision than new ones that are likely to have been subject to a more rigorous selection and audit process. Maybe now is the time to follow up on answering the question of who we trust with our reputation.

Simon Collins is managing director, regulatory, at Eversheds Consulting