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FCA alert issued to all firms with ARs and IARs

Following an ongoing alert on the 2nd August 2016, the FCA has issued a second notice concerning introducer influence. The previous alert was due to an increase in the number of cases that the FCA had witnessed where an introducer had an inappropriate influence on business carried out by authorised firms. 

This week's alert expands upon the original and highlights the risks to a principal of not having adequate oversight of its ARs and IARs. 

Where the alert can get very confusing is in the fact that the IAR regime only applies to general insurance and consumer credit firms, however quite clearly this warning relates specifically to business that involves the investment of funds. We can therefore deem that it is aimed at all introducers and not just IARs.

 

Introducers’ influence

The FCA state that they have concerns that an introducer can inappropriately influence the business carried out by firms. 

They state that, in accepting business from an introducer, a principal must meet their regulatory requirements as set out in its Handbook. The principal must ensure it understands and mitigates these risks and has adequate oversight of its ARs and introducers and not just accept what the introducer passes through. Otherwise, it may result in the firm and its customers experiencing harm (e.g. as a result of a scam).

They provide an example where the referral from the introducer includes a clear desire expressed by the customer and documentation already completed. 

Whilst the alert is not specific, we are pretty sure the FCA have based this alert on the findings of their thematic work on Transfer Bureaus, as this was certainly a common thread in the feedback we have seen.

 

AR activities and use of Firm Reference Number (‘FRN’)

The FCA expand on this by stating that an AR is given an FRN because of the appointment by their principal. An AR may wrongly use its FRN to carry out additional regulatory activities separate from the business arrangement they have with the Principal. There is therefore a risk that customers may be misled into believing that the AR has the authority to act as it holds an FRN.  As a result, a principal should be aware of all of the activities carried out by its ARs.

Again, I think this leads back in to the bureau review as a number of these bureaus have been set up as ARs to specifically focus on this area of business.

 

Monitoring and due diligence by principals

The final area of the alert focuses on the fact that the regulator found in a number of cases that principals were failing to undertake sufficient due diligence on their ARs and introducers and there was a risk customers may suffer financial harm as a result. 
 
The alert focuses specifically on cases where the underlying investments may be controlled by or closely linked to the introducers or ARs, some of which turned out to be outright scams. It also highlights the fact that principals are not always monitoring the type, volume and source of business being introduced. 
 
The FCA includes a number of bullet points for firms to think about in relation to their relationship with ARs/introducers:
 
the introducer relationships you and your ARs have, in order to determine if your firm is under undue influence;
  • your AR relationships, to ensure they remain necessary, appropriate and relevant for your type of business;
  • your processes in relation to persons with significant control and senior management responsibilities/functions within your ARs;
  • whether your AR and introducer due diligence and monitoring processes are adequate; 
  • whether you need to take any additional steps to ensure the actions of your ARs are compatible with their obligations as an AR and allow you to meet your regulatory responsibilities; and 
The FCA close by saying its work in this area is continuing and that it will take action, where it identifies non-compliance within it's requirements. They expect firms to consider the content of this alert and take appropriate action.