The UK financial regulator, the Financial Conduct Authority (FCA), has asserted that investment management principal firms too often have "weak or under-developed governance arrangements" for appointed representatives (ARs).
In a letter to CEOs of principal firms, the FCA said they risk facing action from the UK regulator.
The FCA has told investment management principal firms to tighten up governance of appointed representatives, or face action from the regulator. The sternly worded "Dear CEO" letter, which is signed by Megan Butler, the FCA direcctor of supervision, claims "a lack of effective risk frameworks, internal controls and sufficient resources."
Butler claims in her letter that principal firms are not declaraing their appointed representatives' fee tariff information to the regulator. She writes that "the balance [is being] covered by other fee payers."
Butler added: "Where we reviewed firms' assessments of the adequacy of their financial resources (where required under the prudential regime), more than 90% were not fit for purpose. We expect to see that firms have acted on the findings of this letter."
It also notes principals' failure to identify and manage conflicts of interest inherent in this business model risks ARs causing harm to consumers and to the market.
The FCA says it found principal firms' assessment of their financial resources was inadequate in the majority of cases because they are failing to properly assess risks arising from the activities of ARs. "A number of ARs were acting outside the scope of their principal's permission, in breach of the general prohibition," she writes.
The FCA surveyed 338 principals in its review, and there are more than 1,000 ARs working in the investment management sector.