Who wants full disclosure?

The latest row over commission disclosure has been ignited by Lloyd's trade bodies, the International Underwriting Association and the Lloyd's Market Association.

The FSA is in the throes of reviewing responses to a 'Dear CEO' letter sent out at the end of last year questioning how the retail broking market is handling conflicts of interest. Failure to show that the customer is being put at the heart of the insurance buying system, the regulator says, will result in mandatory disclosure.

The LMA and IUA last week added their voices to the debate after a survey of international commercial clients revealed an overwhelming appetite for full disclosure.

The trade bodies said respondents to the survey, conducted by Insurance Research and Strategy, favoured a business model which recognises commission and fees from clients, as well as payments from underwriters, including commissions paid in the London market.

Andrew Kendrick, chairman of the LMA, provoked outrage in the regional broker market when he said: "Here is independent testimony that commercial customers believe that full transparency is the right solution to broker remuneration.

"Mandatory disclosure of broker commissions is the right way forward and enable the market to operate competitively."

For international brokers like Marsh, it is the right way forward.

Rocked by the investigations of New York attorney general Eliot Spitzer, Marsh wants to show itself as an impeccable broker with strong ethics. And it is in full favour of full commission disclosure.

Toby Foster, chief executive of UK retail at Marsh, says: "We believe that all our customers, be they large, sophisticated risk management clients, middle market companies, SMEs or private individuals, should know exactly what their broker does for them and exactly how much their broker gets paid."

He says Marsh has been implementing a full transparency structure for the last 18 months.

Regional brokers, however, believe the motives behind the calls from IUA, LMA and Marsh are dubious.

Eric Galbraith, Biba chief executive, led the broker backlash. He says: "There is no call from customers for full disclosure. Why should we be asking the FSA for more rules?"

The Lloyd's trade bodies, he says, "extrapolated results from the survey" to meet its demands.

Broker Network chief, Grant Ellis, says: "The Lloyd's bodies are asking international commercial markets, there is no call for this from UK plc. I don't know what the motives are, but it is a little strange to be lobbying for extra regulation."

David Loochin, a commercial accounts executive for Towergate Risk Solutions ARG, says the survey got the answer it went looking for.

He says: "The moral of this story is two fold: ask the right question and you will get the answer you want; or the pot often gives the kettle a call to say do as we say, not as we do."

In other words, clients might want full disclosure, but, in Loochin's opinion, commercial clients would not welcome full disclosure in their own fields.

There is an added danger that full disclosure could lead to a price war, with larger market players able to cut commissions, others argue.

But small brokers may be forced to sacrifice the quality of the product in favour of a lower commission.

In this climate, asks Stuart Reid, chief executive of Stuart Alexander, "who is the winner? Not the consumer."

There is also a cost associated with the establishment of full disclosure, which, according to Ellis, will undoubtedly be passed onto the consumer. "The reality is that some remuneration pays for the work the broker does for the insurer," he says.

"This is not a simple equation. In the end the customer will end up paying. This is not a free lunch, it has to be paid for."

Alex Peterkin, a director of compliance consultants FSA Solutions, says full disclosure is inevitable in the current compliance climate.

"The expectation is that mandatory disclosure will come into the life and pensions market to accommodate MiFID," she says.

MiFID, or the Markets in Financial Instruments Directive, will come into force on 1 November 2007. The FSA expects the European directive to dramatically alter how the financial services are regulated across the board.

Peterkin predicts that MiFID will mean full disclosure and become statutory in the life and pensions market and ultimately the general insurance sector.

She says: "The FSA would encourage intermediaries, where they are selling products for insurers, to disclose what they are being paid by the insurer.

"If life and pensions is mandatory, the general insurance market will become isolated. It will need to follow."

The FSA is expected to tell the UK retail intermediary market how it is going to be moving the debate forward in coming months. This latest development, however, highlights that the battle on both sides of the commission disclosure argument will rage on despite the regulator's stance.