In the shadow of the regulator

See also: The FSA's proposal

FSA chief executive Hector Sants and his inspectors are ready to get heavy. Worried that customers are losing out because of murky practices in the UK commercial insurance market, they are set to tighten up the red tape. If Sants has his way, brokers could have to declare commission, including commission for sub-contractors, voluntarily to every client, whether they want it or not. This, the FSA thinks, will force brokers to manage potential conflicts of interest with their insurer partners.

But the market has one final chance to stop this happening. The FSA has published a range of proposals for the new regulatory regime and given the market three months to respond. In the meantime, its inspectors are knocking on brokers’ doors up and down the country to check whether they are complying with the existing rules and codes of conduct. What they find will have great influence on how much more regulation they decide to impose. So what can brokers do to beat back the regulator?

“The FSA has an over-arching belief that if it is not written down then it should not happen.

Steve White, Biba

Steve White, regulation and compliance manager at Biba, says brokers should not fear the FSA inspectors, but urges them to be prepared. “They will ask things like, ‘do you have an internal policy [for managing conflicts of interest] in place?’ They will check that you are managing them,” he warns. “They might look at board minutes and management minutes, maybe even client files. They will have an audit programme that they will need to complete.” This paper trail is key to keeping the regulator happy. “Brokers should remember that the FSA has an over-arching belief that if it is not written down then it should not happen,” says White.

The trade body adds that if brokers structure their remuneration correctly, they can protect revenue streams and their customer base, without facing regulatory sanctions. But why is the FSA so worried about commission?

It is concerned that brokers are failing to disclose financial relationships with insurers, and that this is having an adverse impact on consumers. For example, broker A could receive contingent commissions from insurer B if he placed a certain amount of business with it, thus making him more likely to place that business with that insurer, whether or not it was in the client’s best interests. The FSA believes that forcing brokers to make a full disclosure of all commissions, including contingent commissions, will force them to manage such conflicts of interest. The FSA has had its beady eye on commission disclosure ever since it began to regulate general insurance. But following an ‘ ‘ independent cost-benefit analysis which last year found that the cost of forced disclosure would outweigh the benefits, the FSA vowed to investigate a wider set of market inefficiencies before making a decision.

“The increased blurring of the distinction between insurers and intermediaries increases the need for conflicts of interests to be managed.

Hector Sants, FSA

One of those issues, conflicts of interest, became the FSA’s key focus, prompted by seismic shifts in the broker landscape. Its investigation, launched at the end of last year, followed a spate of insurers acquiring commercial brokers or taking stakes in them. Early last year, AXA, for example, acquired Layton Blackham, Stuart Alexander and Smart & Cook, to form its broking division, Venture Preference. Groupama was also active, acquiring brokers Carole Nash and Lark, and taking a majority shareholding stake in Bollington. Since then, the deals have continued, with AXA buying SBJ, and Allianz looking to up its stake in Oval, to name but two.

According to an official statement from the FSA’s Sants, made at the end of last year: “The increased blurring of the distinction between insurers and intermediaries increases the need for conflicts of interests to be managed.”

Another area surrounding conflicts of interest that the FSA is paying close attention to is the increased use of delegated authorities, and where brokers accept risks on the insurer’s behalf. Or they may just take on administrative tasks for the insurer, often through the use of managing general agents (MGAs). These arrangements, which are growing in popularity, are perceived to increase the risk of conflicts of interest.

So when the inspectors come knocking, it’s up to brokers to convince them that they can treat customers fairly without the need for additional regulation. Otherwise, they will soon finding themselves facing more red tape than ever before.