We expect you to have the right procedures to effectively monitor and control your business and networks of appointed representatives.
As more firms seek to join networks, principal firms could face increasing risks to their business, particularly with regard to preserving cash flow and maintaining satisfactory controls.
We have set out some key points for principals of smaller networks and a list of questions to help spot potential risks. When we say 'networks', we mean firms with 5 or more appointed representative firms, or with appointed representatives who have 26 or more individual advisers between them.
Knowing your business
We expect you to know your business and be able to show this by having the right procedures in place to monitor and control your business effectively.
Network principals are responsible for the sales their appointed representatives make and they need to be satisfied that their appointed representatives are offering sound advice and treating customers fairly.
You can get evidence of whether this is happening through your compliance monitoring. This could include, for example:
- observed sales and advice sessions between your appointed representatives’ staff and customers
- file reviews
You should also produce and make use of management information to help you identify trends and manage risks to the network, its appointed representatives and its customers.
Examples of this could include collating, analysing and acting on:
- sales of particular products and provider spread
- complaints data
- policy claims that are refused by insurers (particularly relevant for general insurance firms)
The amount and quality of information you collect needs to reflect the business your firm does and allow you to identify the risks it faces and manage them proactively.
Having a clear reporting structure within your firm, so that you and your appointed representatives know who is responsible for what, will help your monitoring. You should make sure that between you and your appointed representatives there are:
- clear reporting lines
- clear information flows; and
- defined roles and responsibilities
More firms joining your network
If you are increasing the size of your network, you should be able to identify and manage any risks and issues expansion will bring to your business. This includes having adequate systems and controls in place to manage the take-on and monitoring of new appointed representatives.
You should be vigilant for what we call ‘phoenix firms’ – firms who may seek to join your network as an appointed representative as a way back into the industry once they have left behind liabilities in their previous guise.
Cost-cutting needs careful consideration. You must maintain adequate, competent resource to monitor your appointed representatives effectively to ensure they meet our requirements and treat customers fairly. A blanket cost-cutting across the network could bring additional risks. It is better to identify the benefits and risks of any cuts and then carefully manage the processes to make sure what you do leaves your business financially viable in the long term, with key skills and processes still in place.
Other key points
As network principal firm, you are responsible for the following:
- Monitor your appointed representatives on a regular basis to make sure they remain competent and financially stable.
- Make sure your own business and that of all your appointed representatives meets our requirements.
Professional indemnity insurance
- Make sure adequate and continuous professional indemnity insurance cover is in place to cover any liabilities that may arise from your network.
Keeping us informed
- Make sure you keep us informed of who your appointed representatives are and that, where appropriate, you gain approval for all individuals holding governing functions within your appointed representative before they begin regulated activity.
What to consider
Do you have:
- enough cash flow to meet liabilities as they fall due?
- a cost-management process to identify both the benefits and risks of any cost-cutting exercise?
- a clear internal structure, so your people know who is responsible for what?
- systems and controls in place that ensure close and continuous supervision of your appointed representatives?
- the right people with the skills and competence to carry out those roles, especially governing and control functions?
- enough evidence to satisfy yourself that your appointed representatives are offering sound advice and treating customers fairly?
- a regular review your management information to ensure that it remains relevant?