Administration fees will be in the firing line as FCA deadline on pricing reform looms

By Content Director Saxon East

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Saxon East

As the FCA deadlines for fair value fast approach, brokers will need to think carefully about administration fees.

To illustrate why the FCA is so concerned, let’s use this example. 

Mr John Smith is a business owner from Cardiff needing a £50,000 premium to cover most of his needs.

The broker takes a 25% commission on the premium. However, the broker also charges an administration fee. 

Not only that, but when the premium is placed into an MGA, that also charges an administration fee.

It’s not unheard of for administration fees to equal the commission. 

So, there are two major issues. Firstly, the amount brokers charge for administration fees.

Secondly, is the client being ‘double charged’ because the MGA or wholesaler also takes an administration fee?

Double whammy

Why are all these administration fees being charged?

Intermediaries will argue it is because of the complexity of the work now required - they believe they have become more akin to risk managers. 

The more cynical would say this is to prop up the business models of brokers, with some now surpassing 40% earning margins. 

So far, the FCA has only highlighted tradesman insurance as an area of SME concern on administration fees and commissions. 

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However, what the FCA says on tradesman should be used as a read-across for all products. 

To be clear, not all brokers have high administration fees. Many take oversight on overall charges in the distribution chain, particularly as they are pressed by insurers. 

But some broker charges are clearly out of line with the rest of the industry. They also own MGAs but charge administration fees twice - once with their broker and another with their MGA. 

One suspects the regulator will make examples, with the most egregious behaviour being fined and censured. 

We may even see the hammer brought down under the Senior Managers and Certification Regime (SMCR), where individuals are held responsible. 

Nobody can say they weren’t warned. 

 

 

 

 

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