Out-Law / Your Daily Need-To-Know

Regulator to address potential conflicts of interest for insurance brokers in thematic review

Out-Law News | 09 Jul 2013 | 7:56 am | 1 min. read

The financial services regulator is to begin a review of how insurance brokers deal with potential conflicts of interest arising as a result of changes to their business models, its head of insurance has announced.

Speaking at an industry conference, Simon Green of the Financial Conduct Authority (FCA) said that the project would initially focus on small and medium sized enterprises (SMEs) and micro-businesses. The FCA would report on its findings by the end of the year, he said.

The project will look at whether payments between insurers and brokers affect which product a broker recommends to a consumer, but will also look beyond potential conflicts in the sales process to claims handling and management. The work will take the form of a "thematic review", which is used by the regulator to assess a current or emerging risk relating to an issue or product within a sector or market.

"The insurance broker business model has changed and evolved radically over the last decade," said Green, in comments reported by Insurance Age, which organised the event.

"An increasing number of brokers now take on many areas of the value chain, functions historically taken on by insurers. Our starting hypothesis is not that there is a problem, but that the market has evolved quite considerably and we want to test how conflicts of interest are identified and managed," he said.

Green said that the review would look at two broad areas in which conflicts of interest could arise for insurance brokers. It will look at broker's products, services and business structures, and consider whether there are aspects of brokers' business models that could work against customers' best interests. The first strand will look at payments between insurers and brokers and examine whether brokers have processes in place to prevent them looking at revenue from the insurer rather than the best outcome for the customer.

The second strand will address changing business models to examine claims handling and management processes. This is in response to the increasing part that brokers play in relation to these functions, which were historically taken on by insurers. The FCA is concerned that "increasing reliance on revenue from sources other than standard broking fees increases the risk of conflicts of interest", it said.

Insurance expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that the review was a "great opportunity" for regulators to bring clarity to a sometimes challenging issue.

"It's a real challenge for brokers to manage conflicts in accordance both with the regulatory requirements and the applicable, but separate, common law obligations that a broker owes to its customers," he said.

"This is a great opportunity for the regulators to bring some clarity to the market, which many insurers will also welcome, particularly if it leads to a simplification of remuneration structures," he said.