On 2 August 2016, we issued an alert following an increase in cases of introducers having an inappropriate influence on business carried out by authorised firms. This alert expands on that. It also highlights the risks to a Principal of not having adequate oversight of its ARs. As a Principal you are responsible for the regulated activities of your ARs and we expect you to consider the following risks and act upon them where relevant.
The business carried out by a Principal and its ARs can be inappropriately influenced by an introducer. This can include an introducer exercising substantial influence over the final investment choice and undertaking tasks central to the advice process. For example, we have seen instances where the referral from the introducer is made with a clear investment desire expressed by the customer and documentation already completed. In accepting business from an introducer, a Principal must meet its regulatory requirements as set out in our Handbook. It must ensure it understands and mitigates these risks and has adequate oversight of its ARs and introducers. Otherwise, it may result in the firm and its customers experiencing harm (e.g. as a result of a scam).
AR activities and use of Firm Reference Number (‘FRN’)
An AR is given an FRN as a result 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 because they have an FRN. As a result, a Principal should be aware of all of the activities carried out by its ARs.
A Principal should also consider why it is appointing an AR and whether this is necessary for the activities they will be carrying out. We have found Introducer Appointed Representatives being appointed when their only business is to generate investment introductions. In this case, they may not need to be authorised for this type of activity (for example, if the introduction is to an authorised person who will provide the client with independent advice or will exercise independent discretion in relation to the investment or class of investments that are the subject of the introduction).
Monitoring and due diligence by Principals
We have found some Principals undertake insufficient due diligence on their ARs and introducers and there is a risk customers may suffer financial harm as a result. This is because some of the underlying investments may be controlled by or closely linked to introducers or ARs. Some of the investments may be badly run while others may be outright scams. You may find checking Companies House’s website useful when considering AR and introducer relationships.
We have found some Principals are not always monitoring the type, volume and source of business being submitted by its ARs. A Principal needs to have a well-structured monitoring process in place to identify business trends which could result in risk to customers including poor investment outcomes. In addition, if an AR has not submitted any business or generated introductions for some time a Principal should consider why they should remain registered.
Further, a Principal should ensure that no-one at their ARs is appointed for a role without prior FCA approval where required. For example, in designated investment business all directors of ARs need prior approval from the FCA.
A failure by a Principal to identify all persons with significant control or senior management responsibilities/functions may mean it is not aware of any potential inappropriate influence by other parties.
As a Principal, you should review and consider:
- the introducer relationships you and your ARs have 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 alert issued on 2 August 2016.
Our work in this area is continuing and we will take action where we identify non-compliance with our requirements. We expect you to consider the content of this alert and take appropriate action.
Further information and related bulletins
Subscribe to The Financial Analyst to get original opinion and all the latest news on trending financial topics and breaking stories related to analysis and global markets. If you have a tip or a financial opinion to share get in touch to submit your story.