Insurance brokers given chance to avoid mandatory commission disclosure

Out-Law News | 17 Dec 2008 | 5:25 pm | 4 min. read

The Financial Services Authority (FSA) this week shelved a proposal to make it compulsory for insurance brokers to disclose their commission in favour of industry guidelines to improve the information business customers are given during the sales process.

But the regulator warned that it will review the situation in 2010/11 to assess "whether customers are receiving sufficiently clear and comparable information about their intermediaries' services, capacity and remuneration".

The announcement came in the FSA's long-awaited feedback statement on transparency, disclosure and conflicts of interest in the commercial insurance market, published on 16th December.

Current regulations require intermediaries to disclose the commission they earn to their commercial customers, but only if the customer asks for the information.

Research commissioned by the FSA, however, indicated that businesses, particularly mid-sized businesses, buying insurance are confused about how (and how much) insurance intermediaries are paid, the services they provide and even for whom they act.

The regulator believes this lack of transparency can give rise to conflicts of interest, particularly as the traditional distinctions between broker and insurer become increasingly blurred. Intermediaries nowadays frequently carry out functions for insurers, yet commercial customers still tend to assume an insurance intermediary will be acting solely on their behalf. 

In March this year, the FSA published a discussion paper putting forward three options for reform: a more rigorous enforcement of existing rules, enhancing the current 'on request' regime to improve the information customers are given, or making the disclosure of commission compulsory.

Since then, the FSA has been involved in discussions with trade associations, insurers and intermediaries, as well as carrying out further research into conflicts of interest and how commercial customers currently use information about commission and services.

Customer outcomes

The end result is that, instead of mandatory commission disclosure (opposed by most respondents to the discussion paper), the FSA has opted for an industry-led solution aimed at achieving five "customer outcomes".

These are that commercial customers should have clear and comparable information about the commissions intermediaries receive, the services they provide and the capacity in which they are acting. Customers should also be alerted to their right to request commission information and be made aware where there is a chain of intermediaries involved in arranging the cover.

The FSA wants to see this information given a prominent place in the sales process, before the customer buys the insurance. When a customer wants to know about commission, the intermediary should explain the different types he receives, including any contingent commission (additional commission earned by bringing business to a particular insurer).

The intermediary should also explain whether he will be acting as agent of the customer or the insurer. In some situations this may involve explaining his relationship with the insurer, for instance by setting out all the paid services he undertakes for that insurer. 

Intermediaries will be assisted in reaching the FSA's desired outcomes by industry guidance, which is to be given a special status by being formally "confirmed" by the regulator.

This means that, although it will not be compulsory for firms to comply, the FSA will not take action against a firm that follows the guidance correctly and appropriately. Once confirmed, the guidance remains valid for three years, after which its status will be revoked unless the industry asks for it to be renewed.

But, despite previous concerns about the use of contingent commissions, the FSA is satisfied that no additional measures to curb conflicts of interests are currently necessary.

Its additional research has shown that contingent commissions account for only about 1.5% of intermediaries' total income and that most firms' arrangements for managing conflicts of interest are adequate. It also only recently issued new guidance on conflicts of interest as part of the project to extend systems and controls rules to a wider number of firms, including insurance intermediaries.

The FSA has also confirmed that it has no intention to introduce any requirement for commission disclosure into consumer insurance, where products are more standardised and it is easier for consumers to shop around and compare prices.

Opportunity

The FSA describes the plan as a "window of opportunity" for intermediaries.

"Our view is that if these outcomes are achieved, the process for arranging mediated insurance can become sufficiently transparent to allow customers to access the information they need to make informed decisions," the paper states.

"We believe that this will address the risk of detriment to middle-segment customers and that, over time, it may also encourage more competitive and efficient distribution of commercial insurance,"  it says.

The Association of British Insurers (ABI) and the British Insurance Brokers Association (BIBA) welcomed the regulator's decision to support an industry-led solution. Steve White, BIBA’s Head of Compliance and Training, said: “We have worked closely with our London Market Brokers’ Committee (LMBC), the ABI and IIB [the Institute of Insurance Brokers] to arrive at a solution which achieves the FSA’s goals in an appropriate and proportionate manner."

"The FSA is giving our sector a final chance to show that their concerns can be addressed without the need for mandatory disclosure," he said.

But the Association of Insurance and Risk Managers (AIRMIC), which represents risk managers and corporate insurance buyers in the UK, said it was disappointed by the time being taken for guidance to be produced.

"There is a pressing need for clarity and a resolution of what constitutes acceptable practice," an AIRMIC spokesman said.

"The FSA’s statement of today gives no indication as to when the proposed industry guidance will be made available but simply refers to the fact that the 'industry has indicated its intention to submit parts of its guidance for endorsement' by the FSA at some time in the future," he said.

The ABI, however, has suggested that guidance will be issued early in 2009.

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