The FCA has yesterday launched a market study into wholesale insurance broking practices. The FCA has published Terms of Reference for the study, which are discussed below. The FCA’s 2017 business plan (published in April of this year) signalled the FCA’s plans to undertake this market study (previously discussed on this blog here).
The FCA will look at whether the sector “fosters innovation and competition in the interests of its diverse range of clients“. In particular, the FCA highlights recent significant changes within the wholesale insurance sector, which has led to new services and business practices being developed by brokers.
Scope of the Market Study
The FCA’s definition of wholesale insurance is a broad one, including “risk business, from overseas and the UK, placed by brokers with Lloyd’s syndicates and insurance companies operating in the London Insurance Market“. The scope of the sector looked at will include both insurance and reinsurance (treaty and facultative).
The focus will be on large and complex risks that are often covered and priced in a bespoke fashion, largely excluding SME and smaller corporate business. An in-depth approach will be taken, looking at the sector as a whole as well as sub-segments (according to, e.g. client type, types of risk, and client location).
The FCA is concerned that new business practices and services offered within the sector as a result of industry pressures on brokers may have harmed competition and potentially insureds. The Terms of Reference indicate that broker remuneration and broker facilities will be a particular focus.
The FCA intends to address three main topics:
1. Market power
The FCA will examine whether individual broking firms hold market power and if so whether it affects competition. As part of this, the FCA will assess the ease of firms’ entry into and expansion within the industry. The FCA recognises that a decrease in clients switching brokers may either be a sign of a lack of competitive pressure, or show satisfaction with brokers’ services.
2. Conflicts of interest
The FCA will examine whether conflicts of interest affect competition and client outcomes. In its Terms of Reference the FCA notes that:
“When brokers select placement options for their clients, there may be incentives to choose the insurer or product which provides them with the highest remuneration, rather than the insurer which best meets the clients’ needs. There may be other features where conflicts of interest arise and that need to be managed. These include possibilities that brokers look to place business within facilities which earn high commissions which may not always be in the best interest of clients. We will consider whether certain business practices may make this worse. For example, these practices could include channeling business to in-house underwriting services to keep more premium revenue within the group, or placing risks with insurers that purchase additional services from the broker.”
3. Broker conduct
The FCA will examine how certain broker practices impact competition. In particular, the FCA will look at how types of insurers (especially smaller firms) may be excluded by such activities and thereby competition may be harmed. Here, the FCA again refers to the use of facilities to place risks (rather than open market placement).
The FCA further states that it will consider “whether there is any evidence of coordination between firms, potentially through an implicit understanding rather than a formal agreement“.
FCA market studies often take about two years to complete, and can have a wide range of outcomes for individual firms and the market as a whole. The review may lead to recommendations for changes in law or rules, or even enforcement investigations. Since 2015, the FCA has held competition powers, but is not conducting this study under those powers – instead using its FSMA powers.
There is no formal consultation on the Terms of Reference for the study, but firms have until 19 January 2018 to submit their views on the topics the FCA plans to address. This can be done by email or letter, using the details provided here. The FCA has provided a list of questions for respondents to consider at Annex 1 of the Terms of Reference.
As part of the market study, the FCA will engage with stakeholders in the industry to research the issues set out in its Terms of Reference. This will be done by gathering information from stakeholders in the industry (including insurers, brokers and insureds), individual meetings with stakeholders, a roundtable event and market research.
Outcomes of the Market Study
The FCA plans to publish its interim report by Autumn 2018, which will set out its analysis and preliminary conclusions. This may also include potential remedies to address any concerns identified.
Following this, there will be the opportunity to provide responses to the interim report and these will be incorporated into the final report. Once the final report is published, a formal consultation on any proposed remedies may sometimes be held, although this is not certain.