Co-branded financial services: the opportunities and regulatory implications

Whilst new technology is creating exciting new ways of delivering financial services to customers, how to successfully take advantage of new digital marketing opportunities in order to capture new customers can still be a challenge for financial services (FS) firms.

The holy grail remains: how do you make a fairly ubiquitous (but ultimately very good) product sound interesting and different? FS Firms are, of course, experimenting with distinctive apps and online services, but there is no getting away from the fact that a loan is a loan and an insurance policy is an insurance policy.

Standing out from the digital crowd

Enter the (now comparatively old) concept of an affinity or (to put it more glamorously) ‘co-brand’ deal. Brand is still likely to be the single biggest driver of traffic to a website, so why not team up with a well-known online brand which has lots of web-traffic, and cut a deal?

Spare a thought, however, for the online partners – they may be entering into a whole new world, and one that is fraught with perceived regulatory risk. They need to be able to articulate those risks to their own boards and ensure that the risks are managed at the outset.  FS firms should ask themselves: are they prepared to guide their partners through (for example) where the line should be drawn between publishing a financial promotion (for which regulatory authorisation is not required) and regulated credit broking?  To what extent is the FS firm willing to consider appointing its new partner as an appointed representative (AR) in order to avoid the need for authorisation?

When an FS firm appoints an AR, the AR becomes exempt from authorisation because the FCA is able to hold the principal accountable, not only for the range of (otherwise) regulated activities the AR carries out, but also for ensuring that the AR delivers fair outcomes to customers. The Financial Conduct Authority (FCA) has recently published an alert highlighting the risks to principals of not having adequate oversight of their ARs.  It emphasises the importance of a principal properly monitoring an ARs’ activities and conducting sufficient due diligence on the AR at the outset.  This applies equally to firms that act as principal for ARs that sit within the same group company structure.  It is not enough simply to put an initial AR agreement in place; being able to demonstrate an appropriate level or oversight and risk management is key.

Some firms are happy to appoint AR’s directly because of the alignment of the parties’ business plans (for example the benefits to both of distributing the principal’s product via the AR’s website). Where this common interest exists, the level of compliance support and engagement will often be at a suitable level.  However, embarking upon this kind of relationship is often perceived by FS firms as involving an unacceptably burdensome extra layer of complexity in terms of compliance monitoring someone else’s business, against a backdrop of increased regulatory risk.

Outsourcing the risks?

The other option for FS firms is to encourage a partner to work with a compliance firm that takes on multiple ARs. These compliance firms have built their business models around successfully taking on and managing multiple ARs from whom they generate fees.  This is made possible because an AR-principal relationship is not the same as an agent-principal relationship at common law – it is a purely regulatory device.  The concern is often that, given the lack of shared interest between the parties, the compliance firm principal may not be as effective and competent at recognising and managing risk as a financial services firm principal.

FS firms should bear in mind that appointing a partner as an AR may not be as risky as it seems. Much depends on the range of activities that the AR will be carrying on.  If the FS firm is entering into a relationship with a partner purely to benefit from online introductions and increased web traffic, the chances are that it will be able to appoint its AR as an ‘introducer appointed representative’ (or IAR).  In such circumstances, it will still need a contract with the partner, but that contract must limit the scope of the partner’s appointment to:

• effecting introductions to the firm or other members of the firm’s group; and
• distributing financial promotions relating to products or services available from or through the firm or other members of the firm’s group.

The level of due diligence required in appointing and overseeing an IAR is lighter-touch than for an AR with broader appointments, in proportion to the reduced scope of the appointment.

As FS firms are looking more widely at cross-selling and marketing opportunities in the digital space, it is certainly worth considering the AR route to assist in getting the product to market, particularly where there have already been good compliance and reporting structures established internally.