Out-Law News 3 min. read

FCA: insurers' lack of oversight of appointed representatives 'risks consumer detriment'


The Financial Conduct Authority (FCA) has taken action against a number of UK insurance firms after finding evidence of "potential mis-selling and customer detriment" by their third party 'appointed representatives'.

Some customers may have purchased products that they did not need or were not eligible to claim under, while some were not provided enough information to make an informed decision by an appointed representative acting on behalf of an insurer or authorised intermediary, the FCA said. In at least one case, it found "significant evidence" that some mis-selling had taken place, which may ultimately require consumer redress, according to a report on its findings.

The FCA has written to insurers and intermediaries to remind them that they retain regulatory responsibility for the acts of their appointed representatives, following in-depth analysis of the way in which these relationships worked at a cross-section of 15 general insurance firms of varying sizes. It has also taken action against five of the unnamed firms as a result of its review, all of which have been banned from using new sales agents and two of which must also cease sales through their existing representatives, it 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," said Jonathan Davidson, the FCA's director of supervision for retail and authorisations. "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," he said.

Insurance law expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that firms that either had been or currently were principals should now review their appointed representative arrangements, including those that they had in place historically. This review should also include any introducer appointed representative arrangements, which were not explicitly covered by the FCA review, he said.

"For both of these categories, firms should consider whether their ARs are suitable and whether proper consideration has been given to the nature, scale and complexity of the potential risks - to both their business model and their customers," he said. "They should also consider whether they have an appropriate risk management framework in place, whether that is properly reflected in the contractual arrangements and whether there is appropriate ongoing oversight and control."

"Firms must also consider what steps should be taken to remediate any deficiencies identified on these points, including what customer redress might be appropriate. Looking forwards, firms should also be considering their approaches as to how they put new AR arrangements in place, in particular that they have the right processes and procedures that properly address the issues identified by the FCA," he said.

There are currently over 20,000 appointed representatives in the UK, which are able to carry out regulated activities under the supervision of an authorised insurer or intermediary acting as their 'principal'. They include telephone sales agents, retailers, travel agents and motor dealers who sell a wide range of insurance products including home, motor, travel, small business, warranty and guaranteed asset protection (GAP) products, primarily to consumer and small business companies.

The FCA identified and surveyed 190 'principal' firms that use appointed representatives, which it then narrowed down to a sample of 15 for more detailed review. Although the problems it identified were not universal, it found some issues at the majority of these firms and also intends to "perform additional work" with some of the firms in the wider survey sample which were not investigated in detail.

According to its report, firms did not always sufficiently consider the suitability of their appointed representatives, or whether the proposed business model was appropriate and would fit with the principal's business. Once arrangements were in place, there was often insufficient oversight and control of the appointed representatives' activities, and insufficient consideration of the importance of an approved person's role within the representative.

"These factors could lead to customer detriment and the FCA was satisfied that, in relation to a number of the sample firms, it had indeed done so," said insurance law expert Iain Sawers of Pinsent Masons. "The biggest risk area was identified as sales, specific examples being products sold where the customer might be ineligible for cover – for example, pre-existing medical conditions in relation to travel insurance."

"The FCA also found that, when the right controls were in fact in place, they were often not properly evidenced. This demonstrates the importance to the regulator of making sure that systems and controls are properly documented, plus evidence of the consideration as to whether and why these systems and controls were appropriate, whether the business model had been properly considered and the risks to customers," he said.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.