In a review of practices it has seen across financial services, the regulator highlights good practices and areas for improvement.

It raised concerns about networks that have allowed AR firms to remain inactive for long periods of time without a clear understanding of why they were not carrying out regulated business.

The report says: “Principals who could not demonstrate effective oversight lacked a clear and up-to-date understanding of their ARs’ business models.

“They could not explain why their ARs had conducted no regulated activity for a period of time.”

It says some principals did not engage with the AR to understand the reasons for inactivity or reassess whether their membership of the network remained appropriate.

In one case, a principal described an AR as “suspended” from carrying out regulated activity due to concerns, however the principal did not clearly document the rationale for the suspension, how long they expected it to last or what the AR needed to do so it could be reinstated.

The principal also failed to notify the FCA of the suspension.

Failures such as these could put consumers at risk and put the principals in danger of breaching their duties, the watchdog warned.

Financial services consultancy Broadstone’s head of redress Phil Smith says: “The FCA’s latest findings underline that inactive appointed representatives are not a passive risk.

“They can create significant blind spots for principal firms if oversight frameworks are not robust and regularly refreshed.

“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 issues seen across the AR regime.

“For firms, this is a timely reminder that accountability does not diminish when an AR becomes inactive.

“Regular reviews, clear exit strategies and strong record-keeping are essential to ensure firms can evidence control and avoid unnecessary conduct or redress risks further down the line.

“Ultimately, the direction of travel is towards more proactive supervision and higher expectations on principals.

“Firms that treat AR oversight as a continuous, risk-based process, rather than a one-off onboarding exercise, will be best placed to meet these expectations and protect customer outcomes.”