Conflicts, transparency and disclosure – whatever next?

After spending most of 2007 conducting a ‘forensic review’ of transparency in the commercial insurance market and deciding that the costs of mandating disclosure would be greater than the benefits, the FSA’s continuing interest in this matter manifested itself in the publication of its Discussion Paper DP08/2 in March 2008.

Much has been written since its publication and it will no doubt continue to attract comment well past its closure date of 25 June. But behind the headlines, what exactly are the FSA seeking to achieve and how is the industry responding?

The paper sets out six outcomes that the FSA is focusing on in their quest to achieve a more competitive and efficient market.

Outcome 1
Commercial customers should have information which indicates the full cost of mediation, including the likely extent of contingent commissions on a standardised and clear basis and the total amount of commission paid to intermediaries throughout the chain.

Biba’s position on disclosure is by now hopefully well known. We certainly support the full and clear disclosure of all remuneration but believe that this should happen upon the commercial customer’s request and not be mandated. We are concerned about some of the practical issues of disclosing the total cost of commission throughout the chain and are seeking our members’ views before finalizing our stance.

Outcome 2
Commercial customers should have clear information about the services an intermediary provides, including the breadth of search he or she undertakes.

Biba has been encouraging its members for sometime to use ‘Terms of Engagement’ with commercial customers. This document should clearly explain to commercial customers the activities undertaken by the intermediary on the customer’s behalf. The status disclosure requirements already include a description of the breadth of choice and we believe that be more relevant than the number of insurers actually approached.

Outcome 3
Commercial customers should have clear information about the capacity in which an intermediary is acting – i.e. whether he is acting for them, for the insurer or, in some cases, for both.

Biba believes this to be important. The ICOBS rules as currently drafted do not require details of the capacity in which the intermediary is acting to be disclosed. This disclosure is contract-specific and could be catered for in any covering letter/document issued to the customer.

Outcome 4
Conflicts of interest arising from remuneration arrangements/business models should be properly disclosed and managed

We fully support this key principle. Biba has produced guidance notes on how to identify and manage potential conflicts of interest and on how to create an internal conflict management policy. Both these papers are available via the Biba website, www.biba.org.uk

Outcome 5
Commercial customers should have sufficiently standardized/comparable information to enable them to gauge the value of intermediary costs and services, and compare these across the market (and over time).

Biba has started to explore the possibility of designing templates to help develop models for disclosure, should it be requested. We have been in dialogue with a number of members who have been assisting with this. In the meantime, the FSA has resisted a standard approach in CP08/3 for investment business and we will argue for them to be consistent here.

Outcome 6
Commercial customers should be made aware of their right to commission information and helped to appreciate the value of using it.

Biba has actively been encouraging members to use a more transparent wording in TOBAs with commercial customers for more than two years. Clearly the FSA will be discussing with commercial customer representative bodies how best to address the customer education aspect of this outcome.

The 25 June deadline is fast approaching and Biba implores all members that have a view on these matters, whatever that view may be, to take this important opportunity to make their voices heard by responding directly to the FSA. When responding, consider the six outcomes – are they reasonable and how best might they be addressed?

Steve White is head of training and compliance at Biba