Trade body says no consumer benefit from mandatory disclosure
There is no market failure from current market practices on commission disclosure, according to the IIB. In addition there would be no consumer benefit from mandating commission disclosure, the trade body said in a written response to the FSA's review into the matter.
The IIB said that to its knowledge, there were "no substantive market failures whatsoever in the UK arising from the current market practice (of the vast majority of brokers), of only disclosing to clients the remuneration they receive from insurers upon request, in accordance with the common law of agency". It said such requests were extremely rare.
In its view, the existing core principles within the FSA rules, requiring brokers to pay due regard to the interests of their customers and treat them fairly, in addition to managing any potential conflicts of interest were adequate, "especially as the FSA itself has stated a desire to move away from prescriptive rules in favour of more principles based regulation".
To ensure that the review is undertaken in a relevant context, the IIB said it is vitally important for those undertaking it to properly understand what insurance commission is and why it is paid by insurers to brokers.
The IIB said that in its opinion "the disclosure of broker remuneration in exact financial terms relating to individual clients would be virtually impossible to achieve".
"On many commercial combined (multi-section) policies commission is ‘variable’ across the sections, such as material damage, business interruption, employer’s liability, public liability, etc. The broker will only find out the exact amount when the insurer’s account is received, which could be several months after inception of the policy.
"Under profit share arrangements it would be impossible to quantify the actual amount earned as the relevant proportion attaching to a particular client, because it is calculated as a sum of the aggregate across the entire account with the insurer. Furthermore, most profit shares are not settled for three years, until all claims have been settled and reserves on outstanding claims calculated (unless reinsured out)."
The IIB went on to say: "The hard disclosure of even basic commission levels brokers receive from insurers, would be another very problematical area, as there would be enormous difficulties in consumers making objective comparisons between two (or more) brokers, who provide different levels of service to insurers. For example, ‘Broker A’ may just introduce policyholders for which he receives 10% and the insurer does everything else, whereas ‘Broker B’ acquires the client, issues all the insurance documentation, attends to mid-term policy adjustments, handles claims, etc. and receives 30%. This could naturally lead to consumers ‘jumping to entirely the wrong conclusion’ and they may wrongly think that they are being overcharged – which could quite unjustifiably be damaging to the broker’s reputation.
"It would be an absolute ‘nightmare’ if brokers on every different class of business and across a vast range of insurers had to justify the level of commission on a case by case basis, by listing everything they do for the insurer (not the client) in order the earn it – the permutations would be endless."
The IIB said it could not think any tangible benefits customers would obtain as a result of mandatory commission (and other broker earnings) disclosure, as all the vast majority of broker clients are concerned about is the ‘bottom line’ price.
