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FCA Thematic ReviewBack

FCAFCA Thematic Review – Principals and their appointed representatives in the general insurance sector.

The Financial Conduct Authority (FCA) has recently published its Thematic Review in the general insurance sector in respect to Principal Firms and their Appointed Representatives (ARs).  The review followed FCA concerns that Principals did not understand their obligations with their AR networks, which they found during their supervisory work and were concerned that this could lead to customer detriment.

Principal and AR arrangements are common in the motor retail sector.  A number of dealers use a Principal firm to provide general insurance products such as warranties and GAP as this allows them to avoid the authorisation and compliance costs of being directly regulated by the FCA.  In addition some dealer groups use Principal/AR arrangements within the business to streamline systems and compliance and make internal controls more manageable.

FCA’s Approach to the review

As part of the Thematic Review the FCA initially surveyed 190 Principal firms who operated AR networks.  These networks had over 6000 AR’s and sold over 10 million policies covering a wide range of products including motor related insurances. From this initial sample 15 Principals were chosen by a risk based approach to be asked for more information. This sample of ARs varied in size and sales methods, sold a range of products and used variety of business models. From this sample 14 Principals and a further 25 ARs were chosen to be visited to have their managers and staff interviewed, and their policies, procedure and documents reviewed.

In a third of the firms visited the FCA found potential mis-selling and customer detriment from the actions of ARs.  Worryingly in most cases these had not been previously identified by the Principal firms.

Issues found

  • Majority of Principals could not demonstrate that they had properly considered the impact on their business of taking on ARs.
  • Many Principals had not considered the risks to their business of having ARs, they had not understood the ARs activity was considered part of their own regulatory activity.
  • Consideration had not be given to the costs associated with the controls required to oversee and monitor adequately ARs.
  • Principals acting as a compliance service rather than regulating their networks.
  • Due diligence of ARs generally very limited. Little thought as to whether an ARs business model and practices fitted with the Principal’s own.
  • Few checks of the financial position and solvency of ARs.
  • Multiple Principal arrangements not always having agreement of all parties in writing.
  • Professional Indemnity Insurance not always adequate or appropriate
  • Principals not always ensuring there were sufficient approved persons within the ARs.
  • Monitoring systems patchy and not always effective.
  • Many Principals focused on training and compliance but ignored important factors such as an ARs financial position, quality of sales process, incentive and reward policies and KPI’s.
  • Reliance by Principals on IT systems to monitor performance and compliance.
  • Imbalance in the relationship between some Principals and ARs. This was seen as a particular problem in the retail sector where it could lead to AR’s dictating terms.
  • Training varied widely and, although seen as key to compliance by many Principals, it was more often than not focused on product knowledge rather than compliance areas. FCA noted that this could lead to a conclusion that training was more about increasing sales rather than compliance.
  • GAP insurance had a specific mention, noting controls for the new remedies were in place but not always effective. A particular concern was around customer signatures being falsified and Principals being unaware of this.

FCA Concerns

The FCA was concerned by their findings as the issues were in their view ‘serious and widespread’.  In five of the 14 firms reviewed there were material risk to customers which came from poor practices.  Of particular concern were the risks that came from poor supervision and intervention by Principals.  The issues were in a wide range of products and included GAP, warranty and motor insurance and were sold by a range of mediums including face to face and internet.

The FCA does note that the problems were not universal and some Principals were supervising firms adequately and understood their obligations but this was a minority.

FCA’s Next Steps

The FCA will be sending a letter to all Chief Executives of Principal firms with ARs in the general insurance sector to lay out their expectations and what actions should be taken to address the issues identified.  There will also be additional reviews by the FCA into this sector and considerations for further thematic reviews and supervisory work in this area.  The FCA will also look at further regulatory actions including potential policy interventions.

For more information please contact Louise Wallis on 01788 538336 or


Posted by Sue Robinson on 29/07/2016