Appointed Representatives - The new rules should be business as usual.

The FCA consultation paper regarding Appointed Representatives is a current hot topic among brokers, so we asked Howard Pepper, Managing Director at Momentum Broker Solutions, for his thoughts on the changes that are being proposed.

When the FSA took over regulation of Insurance in 2005, most brokers shied away from Appointed Representatives.?Already nervous of what the new regulator would mean for them; risking everything for a third party and placing your hard-won authorisation in their hands was unthinkable.

However, in 2022 according to the FCA consultation paper, some 13,500 AR’s operate in the general insurance and protection sector. Whilst some Principal Firms have hundreds (or even thousands) of AR’s, more than half of Principals have just one AR.

Firms operating as both Appointed Representatives and Principals are a broad church.?Originally intended to accommodate self-employed people acting on behalf of their Principal, the regime now includes all sorts of business models including what the FCA have dubbed ‘Hosting’ firms - established specifically to provide their permissions to AR’s giving them ability to operate without direct authorisation and with relative independence.

The emergence of these ‘Regulatory Host’ firms, who carry out little or no regulated activity in their own right, are a concern for the FCA and you can understand why.

So, is this really about us?

Whilst the review has been sparked in no small part by the Greensill debacle, it is wide reaching and likely to affect all Principal Firms in the sector.?Not surprisingly, the FCA’s main concerns seem to be around harm within the retail/consumer sector and certainly the focus of the questionnaire we completed for them in December, was around Personal Lines products and peripheral lines in particular – those likely to be sold by businesses as an add-on to their main lines such as Gap and Mobile Phone Insurance.?

What does this mean for Principal Firms?

That rather depends on what kind of Principal Firm you are.?The consultation paper makes a number of suggestions to improve the regime that will affect different Principals in different ways – for many it will be business as usual, for others it could mean investment in supervisory resource or even a change in business model.

Information Gathering

Much of the concern for Principal Firms will be around the volume and nature of the information that the FCA will require them to submit regarding their AR’s.??The FCA want to know not just what income is generated by insurance (which the Principal surely must already know?), but the financial situation of the AR outside of insurance.?Our typical insurance broker with a self-employed executive as an AR will have no problem with this.?For a business like Momentum, supporting dedicated regional insurance brokers it is simple information, largely available at our fingertips. For those with thousands of AR’s where Insurance sales are not their main activity, this could be very complex indeed

Overseeing AR’s

The FCA are looking to Principals to have systems and controls in place which allow supervision of an AR, which is comparable to that of a directly employed individual operating in-house.?That will be a BIG change for many Principals.?Again, supervising a self-employed executive is pretty straightforward, but we know that many hosting or network firms are currently working at arm’s length from their AR’s – a major selling point for some networks out there being the freedom that their AR’s have to do things ‘their way’.?Not only would these new rules necessitate a review of these business models generally (with supervisory costs rising), they will also come as a shock to their AR members who are used to being left largely to their own devices.

Parting ways

Another area of interest to the FCA is what happens when a Principal/AR relationship comes to a close - either ceases trading or changes Principal.?The FCA is quite rightly concerned about the affect such a change could have on the clients involved.?What happens to the clients if the AR ceases to trade and the Principal isn’t competent to takeover? They are ultimately the Principal’s responsibility after all, so a Plan B is essential.?Not a huge problem for those with AR’s operating in their own area of expertise, but much more so for a Principal Firm that is ‘hosting’ AR’s or using the model to expand their business model.?Principals trying to be all things to all people – direct brokers, regulatory hosts and standard Principal Firms - may find themselves conflicted and short of resource in meeting the FCA expectations.

Responses to the Consultation Paper need to be submitted to the regulator by 3rd March 2022 – watch this space!

The Insurance Age article can be found?here.