Clarity over ‘excessive’ administration fees vital as FCA tightens rules

With the FCA’s fair value review rules coming into force this month, brokers - and the fees they charge - are squarely in the regulator’s crosshairs.

In its initial pricing report - the General insurance pricing practices market study, published in September 2020 - the regulator found holes in the financial services sector’s efforts to deliver fair value to its end users, with the finger particularly being pointed at intermediaries.

Following a subsequent review of firms’ progress in meeting the revised pricing rules deadlines, the FCA said in August 2021 that “it was not always clear firms have adequate processes in place to assess whether intermediary remuneration, such as how much a broker is paid, bears [a] reasonable relationship to the costs or workload to distribute the product, as set out in previous guidance and required under the rules applicable from 1 October 2021”.

There are those in the broker sector which fear, therefore, that the FCA will look to make an example of the market, especially as administration fees are seen as an area where the regulator has ongoing concerns.

James Daley, managing director of research foundation Fairer Finance, said: ”We have seen the costs of administration fees increase over the past decade and while we can understand the need for a charge, those fees can be significant.

“We understand why there needs to be administration charges, but the costs have been creeping up and there are those charging fees which we consider to be excessive.”

Making a profit

For many, however, the remedy is quite simple. There are calls for greater clarity on the fees that intermediaries charge, to remove any doubt among clients as to what they are being asked to pay and how that premium will be shared.

David Sparkes, Biba’s head of compliance and training, said the length of the distribution chain is a concern.

“The FCA does not have an issue in principle with firms charging fees. Instead, the work around fair value looks at a mix of the price of a product against its quality, as well as the price of any service provided at the same time,” he explained.

“The FCA’s issue comes from some, but not all, firms in long distribution chains that seem to be doing little for the money they charge.

“To use the FCA’s own words: ‘This was most prevalent where insurance was linked to another non-financial purchase, such as a car or a holiday.’ This is an important factor when looking at this issue.”

Sparkes added: “In the more common, short distribution chains, which may have a wholesale or placing broker as well as a retail, producing, broker and where the focus is on buying insurance, rather than say buying a car, the market is operating well for consumers.

“The FCA appreciates that regulated firms are commercial enterprises and [are] permitted to make a profit from their activities. The level of competition between market participants - insurers, MGAs, brokers, aggregators - is such that it acts to limit the amount a firm may charge if it wants to win any customers.”

Seventeen Group chief executive Paul Anscombe noted that while most brokers will charge an administration fee, the level of premium income plays a significant role here - for SME and personal lines risks, for example, the commission alone may not be enough to deliver a return for the intermediary.

He continued: “Most brokers view the current system as working. What we need is a single system for the fees associated with SME and personal lines business, rather than a system in which variable administration fees are charged should there be a claim.

“What policyholders do not want is surprises, so it should be clearly explained as to what the charges are, if any, and for what task.

“Some brokers will charge for mid-term adjustments, for instance, but we do not. The charges cannot be too expensive. Brokers are competing with the direct market and other intermediaries, so cost is an issue.”

Sparkes agreed with Anscombe’s view: “In the personal lines market, commission percentages are not high and particularly where premiums are low, the commission received may not cover a broker’s operating costs, so charging a fee may be necessary for the broker to be able to continue to provide their quality service to customers.”

Anscombe added that Covid-19 has been an issue too, with some brokers charging administration fees for the cancellation of coverage as businesses struggle with the economic impact of the pandemic.

Double charging?

Branko Bjelobaba, principal at compliance consultancy Branko, said that brokers need to consider when and if they charge administration fees.

He explained: “Brokers are allowed to make these charges, but are they charging them for a legitimate reason? Are [brokers] incurring costs which the commission will not cover, or is this a case of charging double?

“The FCA [is] saying [it wants] to ensure the fairness of the charge and, as such, there will need to be full disclosure as to why the charge is being made.

“At present, commission charges can be disclosed at the request of the client. The issue for the broker is when the regulator asks: ‘how much extra are you doing?’ For many brokers, the answer is they do not know how much time they spend on an individual client.”

He added: “I hope the FCA will take action in cases where [it finds] that [there] is simply a double charge.”

However, Daley said his organisation had some sympathy with brokers in this situation, particularly in classes where competition means that price restricts commission levels.

“It is tricky for brokers in as much as it costs more to maintain a client,” he explained.

Daley added that large administration fees can be counterproductive too.

“If you can surprise a client in a positive way, such as making administration fees very low, then it engenders client loyalty. It costs less to keep a client then to acquire new ones, so high fees are counterproductive in our view,” he said.