Comment: UK watchdog in broker fees probe

Comment: UK watchdog in broker fees probe

It’s barely 100 days since the UK’s Financial Conduct Authority opened for business and it has already announced its intention to get stuck into brokers.

More specifically, Simon Green, the FCA’s head of general insurance and protection, has made it clear that he has initiated a probe into brokers’ conflicts of interest.

This is like groundhog day. Wind back 10 years and then New York attorney general Eliot Spitzer declared war on contingent commissions and overriders, the payments some brokers demand from insurers to steer business their way.

After a great deal of hand wringing, not to mention huge financial settlements, brokers in the US and in London queued up to declare that they would no longer take contingent commissions. So why does the FCA need to address the subject again?

One can only assume the practice has gradually crept back into a revenue hungry market again.

Launching what he calls “the conflicts of interest thematic project”, Green says he is “particularly interested” in how insurance brokers identify and manage potential conflicts where they receive revenue from both their customers and insurers.

“To be absolutely clear, when I talk about revenue received from insurers I do not mean the payment of broking commission in a normal range. I am talking about profit share, volume arrangements and other payments received from insurance companies,” he said at a recent industry conference.

He said the FCA wants to establish whether the flow of this type of revenue from insurers to brokers acting as agent of a customer might unduly influence a broker to recommend an insurer against the customer’s best interest, and/or cause a broker to improperly perform its duties to its customer.

The probe will focus on mass market business, but corporate broker and insurers need not think they have dodged a bullet. Once the FCA starts talking to people it is almost certain to widen its brief. The outcome of the European Commission’s Insurance Mediation Directive is also not yet clear, but disclosure of commissions and fees is high on the agenda. That will only fuel the FCA’s desire to hold broker remuneration up to the light.

Green says he expects his FCA team to deliver its findings, and final recommendations, by the last quarter of this year.

Ominously for senior managers in broker houses, Green says he will encourage positive behaviours “and come down hard on blatantly bad behaviours that bring the market, your market, into disrepute... Our style of supervision increases the focus on senior management and firms’ culture…Senior management teams set the culture of their firms, so we test that the strategy and tone set at the top align with good customer outcomes.”

The FCA’s predecessor, the FSA earned an unwanted reputation in the years before the financial crisis for being too hands off, and so the new broom will be keen to be seen as a more hands on regulator. Its probe into conflicts of interest, coming on top of the previously announced thematic review claims, is a clear sign that the FCA intends taking a wire brush to broker practices.

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