Forced commission disclosure slammed

A European Commission call for standardised commission disclosure will create pointless extra costs and seems to be driven by political
pressure in Brussels, Biba head of compliance and training Steve White has warned.

Last week a draft commission document was leaked which said that commission disclosure for brokers could be obligatory from 2019 under the revised Insurance Mediation Directive (IMD), which should be published in the coming weeks.

White said: “Is it just political expediency? Is that what they think the world is expecting of them? Because there doesn’t appear to be a logical reason behind it.”

He added that standard disclosure would create unnecessary extra costs, and that the commission’s plans also seemed to unfairly apply investment market logic to general insurance.

“In the investment world it is not unreasonable for the customer to want to know how much of his pound is going into the pot to be invested, and how much is not,” White said. “In the insurance world, ours are contracts of indemnity, so it doesn’t matter how much of the pound is going into the risk pot; the claim will get paid whether it is 80p or 50p.”

Biba chief executive Eric Galbraith said: “If the clause is published, this becomes real and it is unlikely that any politician is going to call for less transparency in financial services following the financial crisis.”

However, Branko principal Branko Bjelobaba said that mandatory disclosure would shed light on some of the “ludicrously generous” commissions being paid to larger brokers. “In essence you shouldn’t be drafting deals to shaft customers, and insurers shouldn’t be complicit in that either,” he said.

Bjelobaba warned, too, that widespread obligatory commission disclosure could also open the door to insurers and large brokers being sued under the Bribery Act.

“Is the payment commensurate with the work done? If the insurer is paying far too much, in essence it becomes a bribe, and if the broker is receiving too much, they know it’s a bribe. The overriding duty is to treat customers fairly,” Bjelobaba said.

At present brokers have to reveal their commissions if the customer asks, but there is no obligation and most customers never ask.

By suggesting that commissions should be made more public, the commission has done a U-turn on the issue after a cost/benefit analysis earlier this year backed the current system of brokers disclosing commission only when asked.

The European Commission was unavailable for comment.