FCA marks principal firms’ homework on appointed representatives – must try harder

The FCA has been focused on appointed representatives (“ARs”) for many years now, dating back to its 2016 and 2019 thematic reviews. It grudgingly accepts that the AR regime has some cost efficiency, competition, and market access benefits. But it sees ARs as high risk, because it perceives that often principal firms undertake inadequate due diligence before appointing ARs and are lax with their ongoing oversight. It rightly observes that the AR regime has evolved from its original use by insurers and other product providers to distribute their products via a network of ARs, to encompass a wide range of models such as regulatory hosting and networks, and products and services ranging from retail and insurance to asset and investment management.

Some high-profile AR failures have not helped. In its 2021 consultation paper the FCA notes that principals of AR firms generate 50-400% more complaints and supervisory cases than firms without ARs, and 61% by value of FSCS claims. We have advised principal firms on a number of such cases in recent years.

Setting firms’ homework

Those misgivings led to new FCA rules introduced from 8 December 2022. The gist of those rules was to clarify and strengthen the responsibilities and expectations on principal firms, and to require them to provide more information to the FCA on their ARs. The requirements included:

  • A one-off information gathering exercise on existing ARs, the rationale of the AR relationship, details of the AR’s business, and the financial and other arrangements with the AR.  
  • Providing the same information to the FCA 30 days before onboarding any new AR, and updating information on existing ARs as it changes.
  • Annual reporting of AR complaints and the AR’s revenues (both regulated and unregulated).
  • Notifying the FCA when a firm intends to provide regulatory hosting services.
  • Enhanced oversight of ARs, ensuring the principal firm’s systems and controls and resources are sufficient. The FCA says a principal’s oversight should be “of a comparable standard as if they were an individual directly employed by the principal”.
  • Annual review of ARs including reviewing the fitness and propriety of the AR’s senior managers, the AR’s financial position, and the adequacy of controls and resources in place to oversee the AR.
  • Ad hoc review where there are changes to the AR’s business model and/or senior management team, or a significant increase in complaints.
  • Annual self-assessment of how the principal is meeting its responsibilities in relation to all its ARs.

Class test

Now the FCA has “tested” 251 firms (c.10% of all principal firms) on their approach to these new obligations, by way of a telephone survey. It also selected 23 firms for a more in-depth assessment. The samples were randomly selected to include firms with many or few ARs, and from a range of different sectors. The FCA published the report card from that exercise last week.

The cohort was damned with the faint praise that they had “made some effort” to comply with the new rules. The class swots were “keeping clear documentation to show compliance with the FCA’s enhanced rules and using a broad range of checks and information to oversee and monitor ARs’ activities”. However, the dunces were chastised for a “tick box approach” to compliance, relying on basic information like website checks or self-declarations from ARs.

One in five firms had not done their self-assessment or annual review homework at all. Of those that had, half were “good quality” (in line with the requirements of SUP 12.6A). Half the class were not regularly reviewing their AR agreements. A third of firms were not using data or management information to monitor whether ARs were sticking within the scope of their AR agreements. And most firms had not changed their AR onboarding or termination procedures since the rules were introduced.

Studies suggest that 65% of people think they are smarter than average. Similarly, 96% of telephone survey participants said they were “very confident” they were effectively implementing the new rules and guidance. The FCA dryly discerned “some over-confidence” in firms’ high self-esteem.

Gold stars were awarded for various examples of good practice in relation to self-assessments, annual reviews, ongoing monitoring and oversight, and approach to onboarding and “offboarding” ARs. Principal firms wishing to avoid detention or a visit to the headmaster’s office should read those, and the countervailing examples of “areas for improvement” carefully.

Next term

Our own recent experiences suggest many principal firms would be wise to prioritize prophylactic improvements to their AR processes, procedures, systems and controls. Oversight of ARs is identified as a focus area in the FCA’s Strategy 2022 to 2025 and so we will certainly continue to see heightened FCA supervisory activity around ARs (including s.165 requests, supervisory visits, and skilled person reviews), and in some cases enforcement action, for the foreseeable future.

APP fraud – might banks have a “retrieval duty” ?

Following on from our Blog post and article from November of last year that looked at the potential liabilities of banks and related parties in the context of authorised push payment (“APP”) frauds, the recent decision of Master Brown in CCP Graduate School Ltd v National Westminster Bank PLC & Anor [2024] EWHC 581 (KB) has again seen the court grappling with the question of the liability of receiving banks, this time considering the potential existence of a “duty of retrieval”.

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FCA’s Consumer Duty good practice and areas for improvement update – Constructive Criticism or Hard Discipline?

When considering the FCA’s enforcement of Consumer Duty, it could be likened to a school teacher attempting to discipline a class. The FCA so far is attempting to retain the authority akin to a headmaster with an iron fist, rather than a flailing substitute teacher with a “kick me” sign attached to their back. Whether the FCA has managed to control its proverbial “class” of firms is yet to be seen, although it is issuing out mixed reviews at parents’ evening for some, and detentions for others.

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Anatomy of a fraud series – Powers afforded by search and imaging orders

Search orders

Search orders are a form of interim, mandatory injunction which require a respondent to allow the applicant’s representatives to enter the respondent’s premises and search for, copy and remove documents or material for the purpose of preserving evidence and/or property which is or may be subject to an action. 

Search orders are, therefore, considered to be one of the most draconian orders a court can make, and particularly so as a respondent may be held in contempt of court for failing to comply with this type of order.  Accordingly, the court will only grant a search order where it is deemed necessary in the interests of justice, and case law and the Civil Procedure Rules have put in place various safeguards for respondents, including the duty upon the applicant to give full and frank disclosure and a need to give an undertaking in damages.

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The Rise of the Pig Butcher

The “pig butchering” scam is not new but has enjoyed a rapid rise in recent years.  So much so, that virtually everyone reading this blog will have been an intended mark at some point, probably without knowing it.  Indeed, if you have ever received a message from an unknown number with a random message that apparently wasn’t intended for you such as “sorry I missed my appointment” or “Hi mum, this is my new number” then that probably wasn’t an innocent mistake, it was the start of the long con of the 2020s. 

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WHO PAYS THE PRICE OF AUTHORISED PUSH PAYMENT FRAUD?

Following on from our recent Blog post about UK Finance’s half-yearly fraud update, in an article published today with the International Banker we look at the increasingly common authorised push payment (APP) fraud and consider what can be done and who might be liable?

Too soon to move on? Supreme Court changes limitation in secret commission cases

The Supreme Court has today provided important clarification on when “deliberate concealment” or “deliberate commission of a breach of duty” by a defendant will extend the limitation period for bringing claims.

The decision is bad news for financial services firms affected by PPI mis-selling claims and other claims in which firms are accused of making secret commissions on financial products, such as interest rate swaps and other derivatives.

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UK Finance – Fraud Update

UK Finance has recently published its half yearly fraud update for the first half of 2023, its findings are based on data reported to it by its members, which include financial providers, credit, debit and charge card issuers and card payment acquirers.

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Opening salvo – enforceability of litigation funding agreements in a post-PACCAR world?

The recent interim judgment of Therium Litigation Funding A IC v Bugsby Property LLC [2023] EWHC 2627 (Comm) appears to give us an early indication of what might become key battlegrounds between Third-Party Funders and certain funded litigants in the wake of the Supreme Court’s impactful determination in R (PACCAR) v Competition Appeal Tribunal [2023] UKSC 28.

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Push-ed Back – Supreme Court Considers Quincecare Duty for Authorised Push Payment (“APP”) Fraud Victims

On 12 July 2023, the Supreme Court delivered its widely anticipated judgment in Philipp v Barclays Bank UK PLC. In doing so, the Court has gone back to basics to explain the basis for and scope of a bank’s duty to its customers, and has brought the Quincecare duty back to a narrower footing.

By overturning the Court of Appeal (covered in our previous blog here), and varying the original High Court ruling (which we addressed in another previous blog post), the Supreme Court has again shown that it will not hesitate to redraw the boundaries of duty where it deems them to have been overly broadened. The case also offers useful clarification on the extent of the Quincecare duty, and of banks’ obligations to their customers more generally.

The decision should be a welcome one for banks, notwithstanding that the Financial Services and Markets Act 2023 will soon provide victims of many APP frauds with a different route to recompense (as well as the Contingent Reimbursement Model Code).

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