Seeing through broker transparency

The issue of mandatory commission disclosure has stoked up fierce rivalry between national brokers and the provincial market.

National brokers already disclose their earnings and are believed to be feeling the pinch. Fixed fees are less flexible and less profitable than commission.

Regional brokers, who in the main are not disclosing their commission, want to maintain the status quo.

The FSA is tight-lipped, only saying it will make an announcement by the end of the year. But there is a growing feeling in the market that disclosure will be enforced – and brokers will have to face the consequences.

The FSA is likely to say that it sees grounds to introduce mandatory disclosure and will produce a consultation paper requesting the industry’s response. Disclosure could be introduced months later.

No one can say what this will cost brokers. But many will need to update their processes, perhaps bring in external consultants to help provide compliant commission disclosure material. Some brokers may decide switching to fees is easier – but this could mean less revenue than commission.

The regulator has engaged consultancy CRA International to undertake cost benefit and consumer benefit analyses.

IIB director general Andrew Paddick is fuming. He says mandatory disclosure is a needless and bureaucratic action which will cost his members needlessly.

He is unimpressed with CRA’s work to date, saying the firm’s broker questionnaire was too difficult. “It infuriates me these consultants are being paid enormous fees ultimately paid for by the regulated marketplace.”

CRA International declined to comment.

Paddick insists this remains an unwarranted FSA investigation, spurred by the Spitzer scandal in the US, but not relevant to the UK market.

Paddick argues that even if there were some UK wrongdoers, they are but a handful. “I have no problems if the FSA wants to investigate brokers. But, imposing mandatory commission disclosure on the market is like catching a drunken driver and taking all motorists off the road. It will be disruptive and expensive,” he insists.

Paddick’s arguments notwithstanding, experts believe the FSA will swing in favour of disclosure.

According to Stephen Netherwood, partner with law firm CMS Cameron McKenna: “It’s not so much the FSA is uncomfortable with the current position as it is regulated, but it’s mindful there is no uniform approval or agreement to the status quo on this issue.

“This is a matter that continually bubbles away. For example, the recent European business insurance review highlighted transparency concerns and the failure to make disclosures. No one in the market can be complacent that change will not happen. I think it will happen, the only issue being when.”

Momentum is building. The European Commission’s report that followed the inquiry into business insurance stated its concerns about transparency and brokerage.

Earlier, Airmic said it strongly favours full disclosure, as does the London Market Association. And, of course, the national brokers are lobbying for a level playing field.

One provincial broker who backs mandatory disclosure is Lyndon Wood, chairman of Moorhouse Group. He says: “Too many brokers lack business acumen. This change is going to mean they have to be more analytical and work out what each piece of business costs them. That could be commission, administration or providing claims support, and making sure the customer is clear on this. Overall, it’s going to be favourable.”

James Purvis, director of consultancy JPIC, also believes brokers need to look on the bright side. “Brokers want to be seen as ‘

‘ offering their clients genuine value. But if they want this, they must be transparent in what they are charging.

“Brokers must try to be positive. Many were doubtful about how regulation would affect them, but it has raised standards and in the same way commission disclosure should be seen as part of good business practice. It will put greater pressure on brokers to show where they’re adding value.”

Martin Membery, a partner with law firm Pinsent Masons, says he can understand some brokers’ frustrations. “Last year, terms of business agreements were widely introduced which drew attention to the fact that clients could ask their broker to disclose what they are earning. It’s understood that few asked.”

He agrees momentum is gathering in favour of disclosure, not least because of the EU report.

Despite this, he believes the regulator will have its work cut out to introduce an effective regime. “The main problem is there are many variations. There needs to be clarity as to what brokers should disclose. An example is brokers have different profit-share arrangements, another is that brokers with binding authorities do more work.”

He is backed up by Purvis who says: “We need better definitions of remuneration. Profit shares might last for three or five years, the whole issue of work transfer is complicated.”

Membery says regional brokers continue with their ‘if it ain’t broke, don’t fix it’ argument, but if change comes, they will have to abide by it. “Brokers who do not comply could find the consequences are very serious and they could be forced to stop trading.”

Netherwood adds: “The fact that clients are not asking for this information will not impress the FSA – it might simply take the view that clients got sick and tired long ago of asking for, and not getting, this information.”

But he argues that brokers should not be too despondent. “If it happens, will brokers’ livelihoods be affected? It will put a premium on client communication and justification for their charges, but every broker will be in the same boat. In practice, the market and brokers will adapt and business life will move on.”

They may have no choice, but many regional brokers will be hoping the FSA will decide the costs of commission disclosure outweigh any benefit – and that the nationals, who took the decision to disclose voluntarily, have scored an own goal.