Fair Fees: Time to look after the pennies

There is little doubt that brokers are up against it at the moment. The ongoing soft market combined with reduced incomes and declining customer appetites continues to hit hard.

This means that, for many, the extra whack of an eight-fold increase in the Financial Services Compensation Scheme (FSCS) levy could not have come at a worse time.

Institute of Insurance Brokers (IIB) chief executive Barbara Bradshaw explains that, consequently, brokers need to keep an eagle eye on expenses in order to survive. “At the end of the day, a broker has to manage on his budget, because if the FSA can’t manage, it just charges us more. Brokers can’t afford to go over,” she warns.

There are ways that brokers can meet the challenge of the exorbitant increase in fees, however. Here, we outline the key six measures every broker needs to be aware of.

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Sometimes it may not be possible to supply penny-accurate figures, but the FSA will accept estimates if brokers can give a detailed account of their calculations.

“The FSA is happy for firms to submit estimates as long as they can support these. They have to show that they have carried out some analysis of their client bank and the premiums and commissions that they are earning, in order to arrive at an amount that is reasonably reflective of the business that is derived from eligible claimants,” Compliance Management Services director Norman Hughes explains.

In the case of calculating commercial combined business and compulsory classes, Biba advises brokers to get in touch with their three largest insurers to see what proportion is made up of the compulsory third-party element and employers’ liability.

Brokers are advised to calculate an average of the three replies and use this figure against their own premium figure to establish the eligible claimant income. Again, it is vital to keep a formal record of this process to be ready for any potential queries from the FSA.

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The FSA bases its fees and levies bill on the information provided in section J on firms’ Retail Mediation Activities Return (RMAR) form. Section J allows firms to provide their ‘eligible claimant income’, which is divided into commissions and fees earned from individuals and business with a turnover of under £1m; and commissions and fees earned from the two compulsory classes of third-party motor and employers’ liability.

Resources Compliance client services director Michael Jones warns brokers that they need to scrutinise their source of income carefully. “The key advice for brokers is to look at their customer bank and see whether they can take advantage of any of those exemptions,” he says. “It is certainly worth excluding clients that have a turnover exceeding £1m because they wouldn’t be eligible for that particular category. Look very carefully at your client base.”

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Previously, there was little incentive for brokers to tailor their income according to the section’s specifications, as the costs of breaking down these figures far outweighed the potential savings. But the massive hike in this year’s fees as brokers take the fall for PPI vendors means those days are long gone.

Biba’s head of compliance Steve White warns that the onus is on brokers to make sure the figures add up. “We have seen a nine-fold increase in fees and so it is fundamentally important that firms are putting in the right figures. Because if they are over-reporting; they are over-paying.”

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Having a good system in place to help break down figures will become increasingly important. “All brokers need to have a proven system of some sort … I think they need to ask hard questions about whether they can get the correct information [from their present system],” Acturis chief executive Theo Duchen says.

He points out that businesses can expect to see a 25% increase in efficiency after installing a new software system, cutting the cost of compiling the accurate data. While investing in a good system is not cheap – it can cost up to £20,000 – the investment may be worth it in the long run if fees continue to rise. In addition, keep an eye out for good deals: some software houses offer free upgrades as part of the package.

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While the burden of the FCSC levy will be unavoidable, there may be other areas where brokers can slash costs. South Essex Insurance Brokers chairman Barry Fehler explains that simple steps such as cutting back on stationery and office equipment, opening client fund accounts in banks with a better rate of interest, and opting for credit card providers with reduced charges can all save money.

“I’m not sure that all brokers look at their other overheads. It is matter of thinking outside the box and not doing the obvious, rather than trying to put up fees or try to get more commission,” he says.

Fehler also stresses that brokers need to look carefully at the insurers they chose to do business with, examining other potential benefits in addition to price.

“Some insurers could certainly try to improve their services because so many brokers waste time and money chasing insurers for responses. It would help if insurers got their documents right the first time and not the third time – goodness knows how much that costs. What we are tending to do now is not just look at price any more but efficiency as well.”

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While many might be loath to take on an extra cost when times are hard, getting expert advice can help make those end figures look a little less daunting.

“Put it this way, it is not going to cost a fortune. It is not a huge amount of work for a compliance consultancy to check the data, so any expenditure will be money well spent because brokers can make sure they are presenting information in the right way and this will increase their chances of getting credit back from the FSA,” Compliance Management Services’ Hughes explains.

Compliance experts generally charge between £200 and £500 per month for regular consultations, but could pay dividends for your business. IT