As we get closer to the transition to the Financial Conduct Authority (FCA) regime we are increasingly asked how the changes will affect the relationship between lenders, brokers and intermediaries. The two areas most likely to affect this day-to-day relationship are: brokers seeking or being asked to be appointed representatives (ARs); and how products are presented and sold into the market.
The most important thing to stress about ARs is that they are exempt from FCA authorisation. However, in order to become an AR a broker must demonstrate to a principal firm(s) that it is fit and proper to practice as it is the principal who assumes the regulatory risk for the AR’s actions.
There are formal requirements which, among other things, must be complied with in order for a firm to be accepted as an AR. If not complied with, these will preclude certain businesses from being admissible. There must be a contract between the AR and principal firm allowing it to carry on business and the principal must also accept responsibility, in writing, for the regulated activity that its AR undertakes.
A principal holding only an interim permission for the relevant credit activity will also be inadequate, ARs cannot operate credit reference agencies or provide credit (unless free of interest and any other charges), or be authorised for another activity. However, a firm with an interim permission for a credit activity may also be an AR for a Financial Services and Markets Act (FSMA) regulated activity not covered by its interim permission. A firm with a limited permission for certain credit activities can also be an AR for other regulated activities, for example, a motor dealer with a limited permission to carry on credit broking can also be an AR insurance intermediary.
ARs may also have contracts with a number of different principals, each of which will be an authorised firm. The AR must have a separate agreement with each principal as well as a multiple principal agreement between all of them. The multiple principal agreement will set out how any potential conflict is managed and how any consumer complaints about the AR should be dealt with, and by whom.
Introducer appointed representatives
In addition to standard ARs, there is the introducer appointed representative (IAR) category. This consists of ARs whose activity is limited to introducing customers to its principal and distributing non-real time financial promotions.
The activities that can be carried out by an IAR are so limited that it is subject to fewer rules and is not required to have any approved persons. If the introducer goes beyond these limitations and, for example, provides advice, it cannot be an IAR.
Know your products and how they are sold
Another key area that will come under increasing scrutiny under the FCA regime is how products are sold by brokers.
The primary responsibilities of a product provider under the new regime are three-fold: to ensure that products are soundly designed for the target market; that these products are sold with clear, understandable information for distributors and customers through appropriate distribution channels; and to perform as the provider promised.
The FCA is concerned that a reward culture is contributing to mis-selling and has raised concerns that most incentive schemes observed are likely to drive mis-selling - a risk that is not being properly managed. How your products are sold, regardless of whether you are a principal to an AR broker, is therefore a key area of potential regulatory risk. Even if you are not a principal for a broker AR then you may be held responsible if your products are mis-sold.
Non-compliance with these selling rules allows the FCA to make temporary rules, lasting up to 12 months, which ban or restrict the sales of products without consultation. When looking to use this power, the FCA will consider whether prompt action is necessary to reduce or prevent consumer detriment arising from that product, type of product or practices.
Areas where the power may be used, include: where consumers are not able to understand key risks or features; features that exploit consumers’ focus on headline price; and where promotional literature is potentially misleading. If you are a lender you will need to ensure that your products do not fall foul of such risks at the go-to-market point, whether that be via a broker or not.
As published in Leasing World – November 2013This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.