• GL
Choose your location?
  • Global Global
  • Australian flag Australia
  • French flag France
  • German flag Germany
  • Irish flag Ireland
  • Italian flag Italy
  • Polish flag Poland
  • Qatar flag Qatar
  • Spanish flag Spain
  • UAE flag UAE
  • UK flag UK

Principal firms who have Credit Broking permissions: Good practice and areas for improvements

20 May 2024

Since new rules were introduced in December 2022, the FCA have been persistent in requesting higher levels of due diligence and ongoing oversight of Appointed Representatives (ARs) by their Principal firms, who are responsible for ensuring compliance. This was in response to high levels of complaints and supervisory cases against Principals of ARs.

The FCA are currently testing to better understand whether firms are properly embedding the new rules across the AR regime; and increasing their engagement with firms and other stakeholders. On 23 April 2024 the FCA published their findings arising from their review of Appointed Representatives (ARs) and Introducer Appointed Representatives (IARs) who undertake Credit Broking. The publication focusses on the good and bad practices of Principal firms with regards to the initial appointment, ongoing monitoring and oversight and the ending of AR relationships.

In this article, we consider the key points raised by the FCA, and while they relate specifically to the Credit Broking sector, it is clear that these can be read across to other sectors and firms should consider how it relates to their own arrangements, to understand where FCA scrutiny may come in the future. 

Initial appointment of AR/IAR

The FCA have detailed within their Handbook and guidance notes that they expect firms to have robust procedures, systems and controls in place, to ensure they conduct appropriate due diligence on their prospective AR/IARs. Prior to on-boarding, Principal firms need to ensure at a minimum that the prospective AR/IAR is solvent, fit and proper and has no close links which could prevent effective supervision by the firm. 

The FCA report praised Principal firms that are able to effectively apply their regulatory requirements into their business model and use this to create effective on-boarding procedures for AR/IARs. For example, having a documented procedure for on-boarding that incorporates a risk scoring system and provides a clear governance process, as well as providing training on the regulated activity that can be undertaken.   

The FCA also identified good practice with regard to some due diligence processes, which included onsite visits, undertaking early vetting of potential AR/IARs using a standardised compliance checklist, conducting a thorough review of financial accounts and linked individuals on Companies House, and anti-money laundering and financial due diligence checks.

Conversely, the FCA identified firms with inadequate systems and controls for on-boarding AR/IARs. Examples of this included not having up-to-date procedures, not undertaking criminal or credit checks and not undertaking thorough adverse media or Companies House checks. There has been evidence of firms with insufficient resources to effectively oversee large number of IARs, as well as a poor understanding of the risks of the business model.

Ongoing oversight of AR/IARs 

Principal firms are required to have in place adequate systems and controls to monitor their AR/IARs on an ongoing basis. They need to ensure that the AR/IAR continue to act within the regulatory remit agreed and that their activities do not result in undue risk of harm to consumers. 

Principal firms therefore, need to have a good understanding of the risks and harms involved with using an AR/IAR to implement effective monitoring. In addition, they will need to have enough resources to undertake this ongoing monitoring and ensure their AR/IARs remain compliant. The relative size and complexity of larger ARs can mean a Principal does not have sufficient skills and resources to effectively oversee ARs. A Principal may also not have the financial resources to deal with the failure of a significantly larger AR or pay appropriate redress to consumers. Firms may need to consider whether very large ARs with a lot of regulated revenue should continue to operate as ARs or whether it would be more appropriate for them to be directly authorised.

Instances where the FCA reported having seen good practice included firms monitoring the AR/IAR's financial position on an ongoing basis and having control over relevant sections of the AR/IAR website with the ability to limit or block access to a firm’s systems for failure to comply with the terms of the AR agreement. The FCA have also emphasised the importance of monitoring the AR/IAR's interaction with its customers, suggesting that this can take place by observing the interactions directly or by getting consumer feedback. 

The FCA have however, identified various areas where firms can improve their current ongoing monitoring of IAR/ARs. Examples included firms relying on limited management information and not taking proactive steps to identify potential harms, not monitoring AR/IAR's websites to ensure compliance of any financial promotions and not conducting checks to ensure they are acting within the scope permitted. 

The FCA have also highlighted that firms should be monitoring that its AR/IARs are continuing to undertake regulated activity and considering the appropriateness of the relationship in instances, in particular where they have not undertaken regulated activity for a long time. In data published by the FCA in September 2023, it was stated that whilst the majority of Principals review their ARs on a regular basis, 38% of Principals only perform criminal record checks at on-boarding, illustrating the risks that could arise from not remaining vigilant as to what AR/IARs are doing after those initial checks.

Ending AR/IAR relationships

The final area the FCA reviewed was the ending of an AR/IAR relationship. In particular, assessing how well Principal firms followed the guidance provided within the FCA's Supervision Manual. 

The FCA was encouraged to see the use of well-documented and up-to-date procedures on how to end the relationship and effectively off-board the AR/IAR. 

Examples of bad practice included not monitoring the AR/IAR's websites post termination to ensure that references to the Principal firm and/or regulated activities are removed and not notifying the FCA in a timely fashion. 

The FCA has encouraged Principal firms to consider their findings and apply them to their current practices, addressing any gaps found in any of the three areas discussed. As noted above, firms that are not in the Credit Broking sector should still consider these updates to be fairly universal and how they might apply to their own business models.

DWF's Regulatory Consulting team have extensive experience working with Principal firms to support them in building and discharging their oversight and monitoring frameworks. We also work with Appointed Representatives across the financial sector, where we help firms understand their unique regulatory position and ensure they are compliant with the relevant regulations.

Our integrated legal and regulatory consulting team can help you navigate through the complex and evolving FCA requirements, by deploying knowledge and resources to support the implementation of stronger requirements.

Further Reading