During a speech on 2 July 2013, Simon Green, Head of General Insurance and Protection at the FCA, announced the launch of a Thematic Review into how general insurance brokers handle potential conflicts of interest between insurers and customers.
A Thematic Review is a study by the regulator of a particular product, practice, or market, across a number of different firms. It can involve firm visits, consumer research, market surveys, and collaboration with trade associations; and the range of outcomes can include feedback on best practice, new rules, and regulatory enforcement activity in respect of firms and individuals.
This newly-announced Thematic Review will be specifically concerned with profit-share arrangements, volume-based commission, and other payments received from insurance companies outside the normal range of commission. It will seek to establish whether these forms of revenue might unduly influence brokers to act against their customers’ best interests, or else perform their duties improperly.
The Thematic Review will also be focused on the treatment of customers which are SMEs and microbusinesses.
Unlike the FCA Thematic Review announced in May into the processing of personal line general insurance claims, which was attributed to an increasing number of complaints in this area, the conflicts of interest Thematic Review does not seem to have been prompted by recent events; rather, it is a response to long-term changes in insurance brokers’ business models, with some brokers moving from straightforward insurance broking to more complex and diverse offerings sometimes involving product design and underwriting.
In addition, the risks of conflict posed by ways in which brokers are remunerated have been a concern of the regulators for a number of years, for instance:
- Following the FSA’s 2008 statement on ‘Transparency, disclosure and conflicts of interest in the commercial insurance market’, discussions took place between the FSA and the British Insurance Brokers’ Association, Association of British Insurers and others, which led to the introduction of formal industry guidance on the subject in March 2009.
- The FCA’s (previously the FSA’s) Insurance Conduct of Business Sourcebook (‘ICOBS’) imposes additional requirements on brokers, beyond the general law on disclosure; on a commercial customer’s request, they must promptly disclose the cash terms figure for commission received (including that received by associates), even where the broker is not acting as agent of the insured.
- The proposed recast of the Insurance Mediation Directive (‘IMD II’) adopted by the European Commission contained a controversial requirement that insurance intermediaries disclose the full amount and nature of their commission (e.g. whether it is volume based, or a profit-sharing arrangement) without requiring the customer to request the information first. The European Parliament, however, has doubted whether this is appropriate; and the trialogue process continues.
- The FCA’s Retail Distribution Review (‘RDR’) introduced a ban on commission paid to brokers by product providers – although this only applies to life insurance investment products and not pure protection products.
- The Bribery Act 2010 re-enforces the existing FSA/FCA principles on conflicts of interest; in Lloyd’s Market Bulletin Y4567 brokers were warned to take “considerable care” when charging commission outside the usual range, so not to fall foul of the Act; profit commission in particular was seen as “very high risk”.
Elsewhere in Green’s speech, he acknowledged the common sentiment that the insurance sector “hasn’t been as deeply scarred by the financial crisis as banks”; although he warned that it “may be critically misunderstood by its customers”. He conceded that lack of customer confidence may arise from “the person in the street” wrongly associating the insurance sector with misbehaviour elsewhere in the financial system; nevertheless, the FCA considers it the responsibility of the insurance sector to play its part to restore customer confidence.
Given this relative blamelessness, the insurance market may find it odd that it is now under siege from so many sides: the industry is facing two Thematic Reviews, and the FCA’s first ever OFT-style market study on the sale of insurance add-ons, and industry concerns about the Financial Ombudsman Service, all against a background of falling insurance premiums and EU-wide legislative uncertainty.
What is clear is that this climate of scrutiny is here to stay and how individual brokers choose to meet the challenge and deal with their regulator will determine how they fare under siege.