When 'we'll tell the FCA in March' is not a permission
Corran Mortgage & Protection Ltd is directly authorised by the FCA, with Part 4A permission covering advising on and arranging regulated mortgage contracts, and advising on and arranging pure protection contracts. In January the directors agree two changes. First, they will offer buildings and contents cover alongside new mortgages: staff will compare three insurer quotes, recommend one, and receive £75 commission per policy from the insurer. Second, they sign an appointed representative agreement with a local estate agency, whose two staff will discuss mortgage options with buyers and pass completed fact-finds to Corran. The compliance consultant is on holiday. A director emails the team: 'We'll add both to our annual notification in March - we can start next week.'
1. Can Corran start the buildings and contents referrals next week under its existing permission? Explain your reasoning.
Read the worked answer
No - not next week, and not without a variation of permission.
- Is it a regulated activity? Advising on, proposing, or carrying out other work preparatory to the conclusion of insurance contracts is insurance distribution, a specified activity under the Regulated Activities Order. Comparing three quotes, recommending one and taking commission is squarely inside that definition: it assists in the conclusion of a contract of insurance. It is far more than an incidental introduction.
- Is it within Corran's permission? No. The Part 4A permission covers regulated mortgage contracts and pure protection only. General insurance is outside it. Carrying on a regulated activity without permission or exemption contravenes the general prohibition (s19 FSMA); s23 makes it a criminal offence, punishable on indictment by up to two years' imprisonment and/or an unlimited fine.
- 'Annual notification' does not widen permissions. Telling the FCA about a change is not the same as being granted the activity. Corran needs to apply under s20 FSMA for a variation of permission, and the FCA must determine that application (it has up to six months) before the activity starts.
- What else is needed before launch: an insurance distribution senior manager; ICOBS-compliant demands-and-needs statements and product information documents; clear disclosure of the £75 commission (which also creates a PRIN 8 conflict to manage); 15 hours of annual CPD for the insurance staff; and a PROD review of the target market.
The director's email is itself the risk: it shows a decision to trade outside the permission, which is an aggravating feature, not a mitigating one.
2. Consider the estate agency arrangement. What must Corran do before the agency's staff start talking to buyers, and can they do more than Corran itself is permitted to do?
Read the worked answer
The AR regime lets them do exactly what Corran can do - and no more.
- Under s39 FSMA an appointed representative may carry on regulated activities only where those activities fall within the principal's own permission, and the principal accepts responsibility for them. Corran is answerable to the FCA for the agency's conduct as though it were Corran's own.
- So the agency can discuss mortgage options and complete fact-finds because Corran is permitted to advise on and arrange regulated mortgage contracts. It cannot sell general insurance - Corran cannot, so the agency cannot.
- Before the agency starts, Corran must:
- put a written AR agreement in place defining the permitted activities and the agency's obligations;
- notify the FCA of the appointment under SUP 12 and wait for confirmation - an unnotified AR is a separate breach;
- satisfy itself on the fitness and propriety of the agency and each member of its staff;
- ensure the staff who advise hold an appropriate mortgage qualification (CeMAP or equivalent) and are within the firm's training and competence scheme;
- bring the AR within its complaints procedure, record-keeping, monitoring visits, file checks and professional indemnity cover;
- ensure the agency describes itself as an appointed representative of Corran on all communications.
- Note the resourcing mismatch: the firm is delegating client-facing advice to a third party while its own compliance consultant is on holiday and its oversight of the AR has not yet been built.
3. Six weeks later the FCA discovers the insurance referrals ran before any application was made, and no AR notification was submitted. What are the realistic consequences and what should the firm do now?
Read the worked answer
Consequences
- The general prohibition was breached for six weeks: the insurance arrangements are unenforceable against customers (ss26–27 FSMA), commission may be recoverable, and restitution under s382 is available.
- Enforcement exposure: public censure, an unlimited fine, prohibition of the director, and possible restitution orders. The 'we'll add it in March' email is damaging - it shows a deliberate decision, so a 'we didn't realise' narrative will not work.
- The AR appointment without notification is a separate SUP 12 breach, and the SMF16 (compliance oversight) and SMF1 holders may face the duty of responsibility for the systems failure.
What to do now
- Stop the insurance referrals immediately and instruct the AR in writing.
- Notify the FCA proactively and in full. Principle 11 (open and co-operative with regulators) requires disclosure; waiting to be caught is a further breach.
- Commission an independent review - possibly a s166 skilled persons report - of every insurance referral and every AR file: was any customer sold unsuitable cover, and did anyone suffer loss? Remediate where so.
- Report to the board, log it as a breach, notify the PI insurer, and anticipate complaints that could reach the Financial Ombudsman Service. The firm cannot rely on the fact that most customers may have got adequate cover: the FCA supervises systems and controls, not just outcomes.
- Root-cause the misunderstanding: directors need training on the scope of permissions and on the difference between notifying a change and being granted one.