Out-Law News 2 min. read
04 Apr 2008, 6:20 pm
Modern market conditions are also increasing the potential for conflicts of interest. Traditional distinctions between insurers and intermediaries are becoming blurred by the trend for insurers to buy stakes in broker firms and the frequency with which intermediaries now carry out functions for insurers under delegated authority agreements.
The regulator wants to make sure that commercial customers are given clear, comparable information about what intermediaries do, how they are paid and any conflicts of interest that might arise.
Current rules require intermediaries to disclose the commission they earn to commercial customers, but only on request.
In December 2007, an independent report by CRA International found that medium-sized businesses in particular are often unaware of their right to ask for this information. And the FSA's own investigations have found many intermediaries are uncertain about what they must disclose and how best to do it.
The FSA believes commercial customers should be able to find out the full cost of broker services, including remuneration earned by any other intermediaries in the distribution chain, and the likely extent of any contingent commission (additional commission earned by bringing business to a particular insurer).
Any changes to the current regime would be backed up by improved measures for managing conflicts of interest and an education initiative aimed at helping commercial customers understand the value of commission information and how to use it effectively.
The discussion paper puts forward three options for reform, although the FSA says it is "keen to encourage a market-led solution if possible".
The first suggestion is for more rigorous enforcement of the existing rules – with some added guidance from the regulator and tighter reporting requirements placed on brokers.
The second possibility is to enhance the current "on request" regime to improve the quality and comparability of the information given. Under this option, intermediaries could be required to remind customers at the point of sale of their right to request disclosure.
The third option is mandatory disclosure. All UK-based intermediaries would have to provide their commercial customers with information about the total commission (including contingent commission) payable throughout the intermediary chain. An obligation would also be placed on insurers to make sure this information was provided to the customer.
Draft rules are annexed to the paper "for illustrative purposes", although the FSA confirms no new rules will be made without consultation and a full cost-benefit analysis.
In December 2007, the CRA International report advised that the benefits of introducing mandatory disclosure by itself would be outweighed by the cost. But the FSA believes this analysis might change if disclosure was combined with other measures, such as improving the comparability and clarity of the information given.
The closing date for responses is 25th June 2008. The FSA will also be carrying out further work with insurers, intermediaries and customers to consider the nature and extent of conflicts of interest, how commercial customers currently use the information they are given and the benefits of improved disclosure.
Feedback from the industry and the results from this additional work will help the FSA decide whether to make changes to its rules. If new rules are required, they will be consulted on in autumn 2008.