The FCA has warned network principals about the risks of failing to properly monitor appointed representatives.
In an overview of the practices it has seen in the financial services sector, the regulator highlights good practices and areas for improvement.
It raised concerns about networks that have allowed AR companies to remain inactive for long periods of time without a clear understanding of why they were not engaging in regulated activities.
The report says: “Principals who failed to demonstrate effective oversight lacked a clear and up-to-date understanding of their ARs’ business models.
“They could not explain why their ARs had not engaged in regulated activities for a period of time.”
It said some principals did not engage with the AR to understand the reasons for inaction or to reassess whether their membership of the network remained appropriate.
In one case, a client described an AR as “suspended” from conducting regulated activities due to concerns, but the client did not clearly document the reason for the suspension, how long he expected it to last, or what the AR needed to do to reinstate the suspension.
The client also failed to inform the FCA of the suspension.
Such failures could endanger consumers and put principals at risk of breaching their duties, the watchdog warned.
Phil Smith, head of indemnities at financial advisory firm Broadstone, said: “The FCA’s latest findings underline that inactive appointed representatives are not a passive risk.
“They can create significant blind spots for key companies if supervisory frameworks are not robust and regularly updated.
“The regulator has been clear for some time that weak governance, poor data and a lack of ongoing monitoring are at the heart of many of the problems within the AR regime.
“For businesses, this is a timely reminder that accountability does not diminish when an AR becomes inactive.
“Regular reviews, clear exit strategies and good record-keeping are essential to ensure companies can exercise control and avoid unnecessary behavior or remediate risks further down the line.
“Ultimately, the direction is towards more proactive supervision and higher expectations from clients.
“Companies that view AR oversight as an ongoing, risk-based process, rather than a one-time onboarding exercise, will be best positioned to meet these expectations and protect customer outcomes.”