Last week, in the face of ever evolving placement and remuneration structures, Lloyd’s reiterated its guidance for managing agents issued in 2012 following the implementation of the Bribery Act 2010 (the Act). The Act makes it an offence to offer, promise or give bribes, or to request, agree to receive or accept a bribe. The Act also imposes a corporate liability for failing to prevent bribery. Lloyd’s aim is to ensure that managing agents continue to consider properly the structure of remuneration arrangements to ensure that relevant laws and regulations are being met.
Whilst payment of brokerage is, and has always been, accepted as a long-standing commercial practice, the payment of additional fees, charges or commissions by the insurer has raised concerns that such payments may be seen as inducing or influencing the broker to place business with a particular insurer. Recent agreements in the insurance market have seen “placement of service fees” being charged and fees paid to brokers in return for additional services to underwriters.
As a minimum, Lloyd’s expects each managing agent to answer the following questions before agreeing additional payments:
- Is the real commercial motivation to agree to the additional payment to secure underwriting business or the opportunity to quote for such business? If so, the managing agent should obtain its own legal advice addressing the commercial motivation. Additional payments that are contingent on the profitability of business or target volumes should never be agreed as these are high risk under the Act.
- Is the additional payment compatible with the managing agent’s obligation to pay due regard to the interests of Lloyd’s customers and treat them fairly at all times?
- Where the additional payment is in return for any services provided to the insurer:
- are the services of real additional value to the managing agent and demonstrably commensurate with the additional payment?
- are the services fully defined and set out in a contractually binding agreement that would meet PRA and FCA requirements?
- Has the broker agreed to provide clear and readily comprehensible disclosure to its clients (the insured/reinsured) as to the amount of the additional payment and the services for which they are paid?
- Can the broker demonstrate that it has appropriate and proportionate processes and procedures to ensure that it will perform its fiduciary duties to its clients? Lloyd’s has confirmed that the confirmations provided by brokers under the 2013 model non risk transfer terms of business agreement are likely to be sufficient for these purposes.
Lloyd’s also recognises that some line-slips do permit profit commissions despite the fact that this might be a high risk activity under the Act and that the managing agent can mitigate these risks by reasonably satisfying itself that:
- The broker has expressly stated to its client that it will not be undertaking a fair market analysis (but instead will seek to place the business under the line-slip); and
- The broker has disclosed, or will disclose, the remuneration arrangements to its client in accordance with ICOBS and any fiduciary duties that it owes its client; and
- The broker is (when required or requested to do so) providing the client with details of the level of profit commission and the basis of calculation.
As well as refreshing and reissuing the guidance, Lloyd’s has also taken the following steps after consultation with the LMA and LIIBA:
- Reminded managing agents of the advice obtained by the LMA on broker remuneration;
- Required each managing agent to reconsider the guidance and its application to business arrangements at a board meeting;
- Implemented sample audits of the returns received from managing agents in connection with additional payments from the first quarter of 2015; and
- 4. Lloyd’s will continue to work with the FCA to monitor these issues.
For the text of Lloyd’s Market Bulletin and the refreshed and reissued guidance click here.