Grand designs

This summer, an update of an obscure piece of EU regulation, the Insurance Mediation Directive (IMD), could transform the UK broking industry. It also could pass on new costs to the consumer at a time when many barely have survived the recession.

The significance of the review defies the dull name of its judge, the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops), which advises the European Commission on key regulations in the sector.

The IMD was implemented in January 2005 to ensure that intermediaries – agents and brokers – operating across the EU met certain minimum standards, such as confirming that they were regulated in their member state. This would give customers a basic level of protection against poor advice.

But the legislation is weak. In the wake of a financial crisis that has seen individual shareholders lose their savings and customers check the small print of their contracts ever more closely, the EU – whose imposing Brussels parliament building is pictured left – is determined to create a far tougher regime for agents and brokers in the name of consumer protection.

Under the UK’s ‘law of agency’, customers have the right to ask brokers how they are remunerated. Typically, this is through commission that the insurance companies pay directly to them. Customers also have the right to know exactly how much the broker or agent receives.

‘Gold-plated’ by the FSA

As a result, the UK has a much stronger interpretation than many other member states of the IMD, with intermediaries in other EU countries forced to disclose only rudimentary information. It is often said that the FSA has effectively ‘gold-plated’ the IMD by enforcing these tougher rules.

The European Commission wants all countries to provide greater detail to customers after the IMD is updated. However, it appears that

Commission director-general for the internal market and services Jorgen Hölmquist wants to go further, potentially demanding that brokers provide all such information to the customer upfront, whether or not he or she wants to know.

In his January letter to Ceiops, Hölmquist said: “The revision of the IMD will take into account the interests of policyholders and also seek to improve legal clarity and certainty. The Commission considers that the current level of consumer protection enshrined in the IMD might not be sufficiently transparent.”

This has significant cost implications. Given that the recommendations are scheduled to be debated in the European parliament in the first quarter of next year, it is also a burden that brokers could face as early as 2014.

Broker Network chairman Grant Ellis huffs when the review is mentioned, arguing that the production of such material on an inevitably grand scale will hurt the customer.

“If mandatory disclosure is applied, it will add a couple of percentage points [to brokers’ overheads],” he says. “Ultimately the cost will have to be borne by the consumer, so it’s complete nonsense.”

For Ellis this is deja vu. In 2007, then FSA chief executive John Tiner damned the IMD as “one of the worst pieces of European legislation”. He also wanted mandatory disclosure, but was shocked to find that there was, in Ellis’s words, “complete ambivalence” to the issue following a review. A cost-benefit analysis could not prove that the move would provide any material gain to the consumer.

“Joe Public was not interested, but Tiner interpreted that as them not being aware of their right to ask,” Ellis argues. “Ninety-eight per cent of transactions are relatively small and what the customer wants to know is how much the policy costs and what it covers.”

However, the FSA has generally maintained its stance. KPMG’s head of general insurance Mark Winlow says: “I can see the UK moving towards a more disclosure-based model. The FSA’s attitude has hardened around consumer protection, particularly in general insurance.”

Biba produced industry guidance in April last year, which suggested a compromise. It said that brokers must ensure that consumers knew they could ask about how the company was paid by displaying that right prominently. In the annex to the guidance, it produced a one-page fact sheet indicating how brokers could achieve this.

Winning the argument

The FSA decided to keep the system under watch during 2010-11, to ensure that customers were receiving suitable service. However, if the FSA wants to feed into the Ceiops review, which is expected to be published in early July, it will have to speed up its assessment. Already, officials have grilled major brokers and are currently doing the rounds with a few smaller organisations.

Biba is hopeful that the FSA will conclude that full disclosure on request is effective, and that making such information mandatory will only mean customers facing yet more paperwork. “The system is as transparent as people want, it doesn’t burden them with information that they don’t want,” regulation and compliance manager Steve White says.

If the FSA shakes off its doubts and backs the UK system, it will have a useful ally. In the USA, the laws of individual states govern regulations on intermediaries. New York state, the most important for international finance, is pushing through legislation remarkably similar to the UK’s right to disclosure. It is thought that the EU is keen to introduce a system that is synchronised with its major international partner.

White is keen for the EU to crackdown on price comparison sites. Unregulated, they aggregate information, such as insurance policies, and do not have to reveal their financial motivations – if they exist at all. This is particularly important for the UK as, bar a few sites that are geared to the French and Spanish, the aggregator model is almost exclusive to this country.

“We’re trying to make sure that aggregation activity doesn’t get taken out [of the directive]; the sites must be within Ceiops’ scope,” says White, who wants to ensure that they do not have an advantage over brokers.

However, brokers themselves could be a major target. The EU is suspicious of the broking model, believing that there is an inherent anti-consumer bias in getting commission on the product it sells, rather than a flat fee for finding the right policy. Brokers could be accused of selling products that generate big commissions or recommending their preferred suppliers, despite being legally obliged to give the best possible advice and having malpractice insurance as a result.

Although considered unlikely, Ceiops might even go so far as to ban commission, meaning the entire UK industry would face a shake-up.

The plus side

If the EU does follow the right to disclosure model, the UK would benefit. Europe is “a year behind” the UK as a result of the Biba guidance last April, Airmic chief executive John Hurrell argues.

Hurrell praises the review, believing that a stronger, more detailed directive will create harmonised insurance broker regulation throughout Europe. “We want a common denominator,” he says.

Insurance lawyer Michael Frisby agrees, arguing that intermediaries currently working under a weak disclosure regime will no longer have the advantage of hiding the sort of information that UK brokers readily hand out. “With the FSA there has been a higher burden. The directive is potentially good news, as it will make intermediaries uniform across the board,” says the Stevens &?Bolton partner.

However, the UK has only a few months to make the case that the country’s system is the most effective. The industry will first have to prove to the FSA that consumers understand that they have the right to ask for information, and that they are comfortable demanding it. Only when the UK regulator is convinced will it be possible to take the argument to Brussels. IT