The failings in the sales processes and the practices of many of these authorised representatives (ARs), who sell products like home, travel and motor insurance, has increased the risk of mis-selling and given rise to instances of actual and potential customer detriment, the regulator said on Friday.
In fact, in five out of 14 instances, insurers and brokers were found to have very poor management and control over their representatives, the FCA said it had been forced to take early supervisory intervention to protect customers.
It said its review of the sector had heightened its concern that there was a material risk of customer detriment arising from the activities of ARs not subject to appropriate control and oversight from their principal.
“In relation to governance and oversight, we found that over half of the 15 principals included within our sample could not consistently demonstrate that they had effective risk management, oversight and control frameworks to identify, monitor and mitigate the risks arising from their ARs’ activities,” it said.
“Some of these principal firms did not appear to have understood the full extent of their obligations for ensuring that their ARs complied with relevant regulatory requirements, particularly in relation to their sales activities.
“When considering the appointment of new ARs, we found that many principals could not demonstrate how they had met their obligations to consider the solvency and suitability of the AR,” the FCA said.
Matt Browne, insurance regulatory director at PwC UK said the FCA’s findings were likely to have come as a shock to some in the industry.
"The FCA's heat is being directed at principles (insurers and brokers), underlining that the regulator expects them to take full responsibility for anything their appointed representatives do. "Some firms may have to pay redress to customers, as evidence of customer detriment including products being mis-sold was found by the FCA's review.
"CEOs of all insurance providers and insurance brokers who deal with appointed representatives will be receiving a letter from the FCA telling them what to expect next - which is likely to include a 'top-down' review of their appointed representatives," he said.
The review, entitled Principals and their appointed representatives in the general insurance sector, was prompted after the FCA became aware, in the course of its supervisory work in the general insurance sector, that many firms did not understand or meet their regulatory obligations where products and services were being delivered by their ARs.
In the UK there are approximately 400 general insurance companies and 5,100 intermediaries that are directly authorised. Some of these firms have appointed and accepted responsibility for over 20,000 appointed representatives (ARs) and these account for about 25% of all the ARs registered under the UK regulatory regime.
The FCA said its review initially involved an online survey of 190 principals (insurers and brokers), operating a network of ARs. These firms were UK authorised general insurers and general insurance intermediaries. They had over 6,000 ARs with 75,000 individual representatives operating at 15,000 locations, selling over 10 million policies mainly to retail customers which generated annual revenues of over £500m ($655m, €597m).
It then selected a sample of 15 principals using a risk-based approach to represent a diverse range of business models, products distributed, sales methods and sizes of AR networks. These 15 principals had 783 ARs with 10,594 representatives operating at 1,684 locations.
“The ARs included in our review sold a wide range of products via a range of methods (face-to-face, internet, inbound and outbound calls, advised and non-advised), predominantly to retail and small business customers,” the FCA said.