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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.
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 firstname.lastname@example.org