What will new regulations for appointed representatives mean for the industry?

On 3 August 2022, the FCA confirmed new rules that make authorised insurance firms more responsible for the oversight and management of their appointed representatives (ARs).

As part of these new rules, which are effective from 8 December 2022, regulated firms within the insurance sector will be required to action what the regulator called “enhanced oversight” of the ARs they work with.

This oversight includes ensuring that ARs have adequate systems, controls and resources. Plus, insurance principals will need to adhere to a new requirement to provide complaints and revenue information for each of its ARs to the FCA via annual reports.

Insurance principals will also be obliged to assess and monitor the risks that their ARs pose to consumers and markets via oversight measures which are equivalent to what they complete for their own business.

The regulator has warned principals that they will receive requests for information about their ARs in early 2022.

An AR is an individual or firm that operates within a regulated industry. Rather than being directly authorised by the FCA, ARs act as agents for a firm that is authorised, which is referred to as the principal.

Pervin Sivanathan, group head of audit and advisory at insurance consultancy Pro Global explained that the regulator’s intention with its revised AR rules was “to ensure that principals and their ARs were competent, financially stable and could ensure fair outcomes for consumers”.

She added that greater oversight of ARs had been on the FCA’s radar for a while.

She explained: “By their very nature, [ARs] are performing a regulated function on behalf of principals, which lends itself to scrutiny from [both] the FCA and principals to ensure they’ve got the right controls and are managing them effectively.”

But what do these new regulations mean for the industry?

Extra responsibilities

The enhanced oversight of ARs that the FCA is implementing will create new requirements for insurance principals, which - in turn - will create extra work for these firms.

Firms within the insurance sector have already complained to Insurance Times about the extra work generated by separate regulatory requirements from the FCA – such as the need to complete fair value assessment forms as part of the regulator’s pricing practices reform. Many, therefore, will not welcome a further increased workload.

Tim Quayle, managing director of MGA platform OneAdvent, told Insurance Times that the new “AR regime is essentially devolved regulation”.

Sivanathan added: “There will certainly be more work to be done because of the granularity of the data [the FCA] is looking for [principals] to catch and report on.”

However, she explained that “a lot of the information the FCA is looking for concerns good business management and good governance”, meaning that ”a good AR should be looking to capture and manage” this data anyway ”because it will aid them in managing their business effectively”.

Quayle, meanwhile, said: “Once the regulations come into force, businesses will be compelled to think much more carefully about their synergies and the ARs they work with.

“Intermediaries that are actively involved in the insurance distribution activities of their ARs will be fine, but those [that] aren’t will not have an easy journey ahead.

“The regulations shouldn’t be too burdensome for intermediaries [that] are doing it right. They will already have the data required by the FCA - it’ll just be a case of breaking it down and presenting it in a much more granular way - but those lighter touch principal businesses will struggle.”

AR regulation impact

Part of the appeal of the previous AR model was its less regulated nature – so will new regulations put a stopper on the increased use of ARs?

Speaking to Insurance Times when the new AR rules were announced in August 2022, Simon Morris, financial markets partner at law firm CMS, said that the pre-regulatory environment for ARs was an “anomaly”.

He explained: “Created nearly 40 years ago, it enabled insurance distributors to tie to an insurer to avoid direct regulation.

“Since then, it has mushroomed, with ARs sometimes larger or more complex than their regulated principals and generating disproportionate costs, claims and complaints.”

Quayle was glad for the increased oversight of ARs, however.

He explained: “I welcome any regulation that protects the integrity of the AR structure – it’s a fantastic model for accelerating innovation, helping companies with good ideas to enter the market more quickly and cost effectively.

“But, the model only works when there is a clear alignment between a principal business and its representatives. This ensures the AR has the support to deliver on its objective and make a positive impact, but with the appropriate oversight and governance to protect customers from harm.”

Sivanathan also welcomed the new regulations and their potential to improve the AR regime. She said: “It’s the end consumers that are [the main beneficiaries from this regulation] and it’s really protecting them that the FCA was focused on.

“Operational resilience ultimately underpins all of this because it’s important that your company is going to be in a position from which it can operate effectively while managing its own outsourcing – so if a function has been outsourced to an AR, can that business withstand major changes?”

Future changes

As part of the announcement of its final rules on ARs, the FCA added that it would keep an eye on the impact of its regulations and “explore if further changes are needed to the AR regime, which would require future legislative change”.

Sivanathan explained: “The FCA has indicated that [it is] going to be proactive and have the consumer at the forefront, so there will be a period of bedding [the new regulations] down during the course of 2023 and probably a reflection at the end of the year.

“Based on this, [the regulator] may come up with further enhancements.”

Quayle added: “As [the FCA] starts to digest the more granular data and gain a better understanding of what works well and what doesn’t, it will start to set guidelines or thresholds for the appropriateness of principal firms.”

The regulator is also likely to consider issues such as whether a very small principal firm can effectively oversee a very large AR, Quayle continued.

In the short term however, Sivanathan said that now is the time for insurance principals to be reviewing their own business practices.

“What companies should be doing now is looking at the FCA statement that came out in August and reviewing it against their current practices to see exactly where they are and putting plans in place,” she said.

“Now is the time to start looking at end processes and controls and [assessing] them against the requirements of the FCA.”