In return, the principal is responsible for initial vetting and ongoing monitoring of the AR’s activities. This relationship has stood the test of time. Recently, however, the FSA used the principal’s oversight function as one of a series of tools for enforcing its senior management responsibility agenda.
Last month, the FSA fined a director of a principal firm £20,020 for AR-monitoring failings. This is a sizeable sum for an insurance broker of its size, taking into account that the director did not knowingly break FSA rules and promptly took remedial action to protect the interests of consumers. This begs the question – is the FSA’s stance on AR monitoring by principal firms balanced and fair?
It is debatable whether the FSA’s approach is fair or proportionate for a number of reasons. First, ARs generally present a lower risk to the wider financial services industry relative to other regulated firms. Misconduct within an AR pales into insignificance if similar circumstances occur in a bigger financial institution.
As a result, any failings are of greater magnitude and impact in the latter rather than former instance and this distinction should be reflected in the FSA’s response.
Second, it is arguable that AR-monitoring failings are not a true senior management issue. As the FSA knows, even with the best senior management (and will) in the world, it is not possible to completely eradicate misconduct in any supervisory arrangement.
Principal firms, like the FSA, adopt a risk-based approach to monitoring and oversight of ARs for the obvious practical reason that intense, close scrutiny of ARs generates costs that far outweigh the benefits. Consequently, it is disproportionate to expect principal firms to deliver a level of supervision of ARs that the FSA itself recognises is not possible or economically viable with its own authorised firms.
The FSA must recognise that there will be the occasional instance where the oversight relationship will not work as desired but this does not mean the AR regime is in need of particular attention through enforcement action.
The FSA would do well to adopt a more balanced and carefully considered approach, bearing in mind what the FSA and principal firms have in common – both parties seek positive outcomes for consumers which in turn translates into growth and profitability for the business and the industry.
Noline Matemera is a lawyer at TLT specialist Financial Services Regulation