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FCA alerts principals of risks in their relationships with appointed representatives

The UK Financial Conduct Authority (FCA) has issued an alert to all principals with appointed representatives or introducer appointed representatives (appointed representatives). The alert highlights some risks there may be for principals in their relationships with their appointed representatives.08 Nov 2017

The alert builds on a previous document issued over a year ago in which the FCA raised concerns about the extent of influence being exerted by some introducers over the business of authorised firms.

In the new alert the FCA warns that introducers can have inappropriate influence on authorised firms and their appointed representatives.  So principals need to make sure they have "adequate oversight" of both their appointed representatives for whose regulated activities they are responsible, and their introducers.

The regulator said some principals were not doing adequate due diligence on their introducers and appointed representatives, warning that customers could "suffer financial harm as a result."

“This is because some of the underlying investments may be controlled by or closely linked to introducers or appointed representatives,” the FCA said. “Some of the investments may be badly run while others may be outright scams.”

The FCA said principals should "review and consider" a number of areas including the introducer relationships they and their appointed representatives have, in case there is any "undue influence" on the principal. It said principals should review their appointed representative relationships to ensure they remain "necessary, appropriate and relevant" and the FCA reminds firms to review their earlier alert.

Principals, the FCA said, should make sure that anyone at an appointed representative who needs prior FCA approval for appointment to a role has it, specifically noting that for designated investment business all the directors of an appointed representative need to have prior approval from the FCA.

Principals should also review their processes "in relation to persons with significant control and senior management responsibilities/functions" at their appointed representatives. Principals need to know who such persons are otherwise they may be unaware of potential for inappropriate influence by third parties.

Financial services expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com, said the FCA's second alert suggests that some firms are not following the directions of the first alert.

“The FCA still has clear concerns following its alert published last year" said Ashby. "The regulator is now also stressing the particular importance of monitoring processes and a level of involvement in the Appointed Representative's business appropriate for the regulatory responsibility taken by the principal."

"These requirements would not be a surprise for any well-run regulated organisation, but the FCA seems to have a number of specific examples of issues it has been able to cite that presumably have led it to publish this further alert. Regulated firms with appointed representatives, or considering appointing them, should take this opportunity to check their approach against the clear expectations of the FCA," he said.