Principals in the Spotlight over Relationships with Appointed Representatives and Introducer Appointed Representatives

Posted on 31 January 2018

Principals in the Spotlight over Relationships with Appointed Representatives and Introducer Appointed Representatives

In November last year, the FCA issued an alert to all Principals who have Appointed Representatives or Introducer Appointed Representatives (ARs). It described an increase in cases where introducers have an "inappropriate influence" over authorised firms and the risks to Principals who fail to have adequate oversight over ARs. This expanded the terms of a similar alert in August 2016.

  • "Inappropriate influence" exercised by Introducers

The FCA noted that some Introducers were closely involved in the advice process and had a significant influence over customers' final investment decisions. The FCA had identified cases where, on referral, customers had already made investments decisions and the paperwork had been completed. The FCA warned that in accepting business from an Introducer, firms must ensure that they meet their regulatory requirements as set out in the Handbook.

  • AR activities and the use of Firm reference Number (FRN)

The FCA also cited the risk that ARs might wrongly use their FRN to carry out regulatory activities outside their arrangements with a Principal. The FCA warned that Principals should be aware of all activities carried out by their ARs. 

The FCA also said that firms should play close attention to why they are appointing ARs and if they are necessary. For example, the FCA had identified cases where Introducers were simply appointed to generate investment business and not to provide advice. In that case, there may be no need for the Introducer to have any additional authorisation.

  • Due diligence and monitoring

The FCA found that some Principals were failing to carry out sufficient due diligence on their ARs and introducers. Some Principals were also failing to monitor the type, volume and source of their ARs business, including failing to identify and assess trends which could result in poor investment outcomes. The FCA also noted the importance of ensuring that no one at their ARs who requires prior regulatory approval is appointed without that approval being in place. The FCA warned that Principals should carry out sufficient due diligence to identify persons with significant control and/or senior management functions in order to satisfy themselves that there are no inappropriate influences at play.

This is plainly an area of continuing interest for the FCA, and its findings represent significant failures by some Principals. As the FCA states, its work is continuing in this area and it will take action where it identifies non-compliance. Given the FCA's consumer protection objective is engaged and that this is the second alert of this type to be issued in less than 18 months, we can expect the FCA to come down heavily on those who do not heed its call to comply.