Small businesses could be over-paying or buying products they don’t need, thematic review concludes

Inherent conflicts within insurance brokers are not being properly managed, a review by the FCA has found.

The regulator looked at seven of the largest brokers with small business clients and concluded that in some firms, control frameworks and management information had not developed at the same pace as business models.

Research into the understanding of small business customers also showed that few understood that there was a possibility for their insurance broker to be conflicted.

Clive Adamson, director of supervision at the FCA, said: “Small businesses are experts in their particular field but are often not experienced in buying insurance. That is why they need to be able to trust their insurance intermediary to act in their best interests. If there are conflicts of interest that are not identified or properly managed, that trust is put at risk.”

By acting as the agent of the insurer as well as the customer, intermediaries have different obligations and sources of remuneration, which create conflicts of interest that need to be actively managed, the FCA said.

The regulator wanted to establish how the flow of money from insurers or other sources to brokers could affect how customers were treated. It found that:

  • There was increased risk of conflicting interests where firms fulfilled multiple roles in the distribution chain and acted as agent for both the customer and insurer in the same transaction
  • The control framework and management information in some firms had not developed in line with changes in the size and complexity of the business
  • Some intermediaries relied on disclosure as the main way to address conflicts of interest rather than having effective control frameworks in place
  • Disclosure provided to customers was sometimes very generic and unlikely to meet their information needs or enhance their understanding
  • Conflicts of interest were not always effectively mitigated in relation to add-on insurance or services, premium finance or where the cost of insurance is borne by a third party.

Consumer research also revealed that small businesses are not aware of the differing roles intermediaries can perform. The majority (68%) believed that brokers acted as their agent when selecting and placing their insurance. 

And 86% of small business policyholders expected their insurance intermediary to search for more than one quote, which was not consistent with placement processes within some intermediary firms. 

The FCA is concerned that if conflicts are not properly managed there is the risk that decisions are made in the interest of firms rather than their small business customers. This could result in some small businesses over-paying or buying products they don’t need.

While the FCA’s review focused on larger firms, the regulator said all brokers should take note of the findings.

The regulator said it would work closely with the industry to communicate the results of the review and use appropriate regulatory tools to address specific issues with the firms involved in the review.