Financial services companies need to be wary of allowing “introducers and appointed representatives” to have “inappropriate influence” lest the advice they give customers causes them “financial harm”, the UK financial services regulator has warned.
The Financial Conduct Authority (FCA) said that it was concerned that fact-finding and regulatory due diligence requirements were being overlooked in a breach of “Principals’ obligations”.
It said that it had seen instances where the referral from the introducer is made “with a clear investment desire expressed by the customer and documentation already completed”.
The FCA reminded Principals that its requirements, and their obligations, are laid out in the FCA handbook, and that a firm “must ensure that it understands and mitigates these risks and has adequate oversight of its ARs and introducers”.
‘Badly run investments and scams’
It pointed out that failure to be thorough in checks may result in the firm and its customers experiencing harm, for example “as a result of a scam” or because some of the investments may be badly run.
Specifically, problems can arise, the FCA said, because an appointed representative (AR) is given a firm reference number (FRN) by the principal for whom the AR is acting.
Consequently, there is a risk that customers “may be misled into believing that the AR has the authority to act because they have an FRN”.
As well as ensuring that business transacted on their behalf meets with regulatory requirements, firms also had a duty to ensure that individuals acting on their behalf met with prior FCA approval where required.
It added, by way of example, “in designated investment business all directors of ARs need prior approval from the FCA”.
The FCA concluded the updated alert by saying that a failure by a Principal to identify “all persons with significant control or senior management responsibilities/functions” could lead to the company being unaware of “potential inappropriate influence” by other parties.
And it summarised by telling Principals that they should review and consider the following:
- 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.