‘The regulatory burden’ is causing consolidation at pace, but will ongoing government consultations help to give brokers the regulation respite they need to stand on their own two feet?

By Editor Katie Scott

Broker consolidation is showing absolutely no signs of slowing down.

Just this week, for example, Arthur J Gallagher and Co confirmed its purchase of motorbike and motorhome specialist broker Devitt Insurance Services. Already this year, the industry has also heard M&A announcements from the likes of The Clear Group, PIB Group and BGL Insurance.

Katie Scott_bw_path

Katie Scott

Speaking to industry commentators, many concur that an overzealous escalation of regulatory requirements from the FCA is partly to blame for broker bosses being on the hunt for new, larger parent companies – which are suited and booted with an in-house, full-time compliance team to dot the I’s and cross the T’s.

For example, Mike Crane, managing director at LV= Broker, told me: “The importance of brokers having a deep understanding of regulatory changes and their obligations continues to grow as an area of strategic importance.

“Larger firms are in a better place to have internal capability to manage this and no doubt this will increasingly be an area driving consolidation as firms look at the best way to respond to regulatory changes.”

Most recently, brokers have been getting to grips with the FCA’s new requirements around product governance, which came into force last October as part of the regulator’s reform around general insurance pricing practices.

There’s also the FCA’s consultation on its proposed Consumer Duty, which closes on 15 February 2022, as well as its recommended crack down on the appointed representative model – this is asking for consultation responses up until 3 March 2022.

Let’s not forget that these consultations also run alongside a myriad of surveys and questionnaires that the regulator has continued to send out throughout and since the Covid-19 pandemic, seeking to check on brokers’ financial resilience and compliance understanding.

And this is just a flavour of the FCA’s to-do list.

Chatting to Manchester Underwriting Management director Richard Webb at Biba’s manifesto launch event last month, he told me that full-time compliance job roles were not the norm in the insurance industry many moons ago, yet now they are becoming increasingly commonplace – and I’m not surprised.

He said: “We all recognise the importance of having a properly regulated industry. But, listening to brokers, you often hear [that] their time [is] increasingly being taken up with regulatory compliance work. It would be interesting to get a definitive number on how much time the regulatory compliance work takes up when running an insurance broker compared to 10 years ago. It will definitely have increased.

“The smaller insurance brokers will often use a compliance consultant. But overseeing the implementation of any changes required, keeping up to date with new changes and [understanding] the areas the FCA is reviewing soaks up time. Not just [for] the compliance consultant, but those people running the business.

“This work takes people away from doing insurance work – serving the customer. When your daily job becomes one of compliance rather than insurer, you can see the attraction of moving into a larger organisation.”

Insurance Times’ content director Saxon East agreed: “The regulatory burden is especially painful for brokers as many don’t have the resources to cope. No wonder so many are selling up.”

Cushioning earnings

Meanwhile, Stuart Reid, chairman of Partners& and Pikl, told me that “consolidation of the broking market will continue apace” following “the marked increase in the regulatory burden” for brokers.

He believes the FCA’s focus on fair value could hit big brokers’ earnings, meaning they will be looking to snap up smaller firms to redress the financial balance.

He said: “With the marked increase in the regulatory burden - as evidenced with yet another ‘Dear CEO’ letter having been sent out in recent days - consolidation of the broking market will continue apace.

“This is due, in part, to the regulator’s firm desire to address fair value and to specifically address areas of the market that have, for some, resulted in earnings that do not reflect that fair value.

“These changes will inevitably impact the biggest brokers hardest, [which] enjoy the highest earnings per client. To alleviate this pressure, they will need to buy.

“As has already been seen, consolidators have started selling - some in the relative infancy of their private equity deal - as they see the earnings they currently enjoy under significant threat.

“Reduced earnings mean a reduced Ebitda and a reduced Ebitda means a reduced sale price, so to sell now - with multiples high and to leave any future earnings issue for the purchaser - has real attraction.

“The big will get bigger and the gap to the rest of the pack will only increase. This will be a big opportunity for those that fill the middle market over the next few years [and] begin to fill that void.”

Sarah Mallaby, distribution and trading director at Axa, believes broker consolidation is more linked to succession planning and exit strategies rather than troubles with compliance, however.

Taking back power?

For readers concerned about the heavyweight stance or overbearing leaning of current regulation, there are a couple of consultations posting question marks above the FCA’s existing approach and powers.

For example, there is the new international growth and competitiveness objective for the FCA proposed within the HM Treasury’s November 2021 consultation, Financial Services Future Regulatory Framework Review: Proposals for Reform.

Open for responses until 9 February 2022, this consultation aims to “ensure the UK establishes [a] coherent, agile and internationally respected approach to financial services regulation”, according to economic secretary to the Treasury John Glen.

The House of Lords’ Industry and Regulators Committee also published a call for evidence last month for its new inquiry into commercial insurance and reinsurance regulation.

Centred on the London market, this inquiry looks at the roles of the FCA and the Bank of England and seeks to “explore the extent to which regulatory policy is well designed and proportionately applied and the possibilities for optimising policy following Brexit”. The deadline for submissions here is 11 February 2022.

Those that have given evidence to the House of Lords so far include the London and International Insurance Brokers’ Association chief executive Christopher Croft, London Market Group boss Caroline Wagstaff, senior lecturer in insurance law from Queen Mary University of London Franziska Arnold-Dwyer and James Davey, insurance and commercial law professor at the University of Bristol.

Regulation has long been an important topic for brokers, however the fact that it is impacting business models heavily enough to actively encourage consolidation is a concern and will stifle industry innovation, as well as the ability to welcome new startups to the market.

Although operating in a regulated marketplace is essential and necessary for insurance firms, so is serving customers – succeeding with these relationships should not be fully supplanted by the need to jump through a steadily increasing array of regulatory hoops.


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