On 20 January the FSA will start its review of how brokers are dealing with disclosure issues.
For brokers the issues of commission disclosure and greater transparency will not go away. On 20 January next year the FSA will begin to assess whether brokers should tell clients how much money they are being paid by insurers for their business.
And unless brokers can prove they are effectively managing conflicts of interest, transparency will become the industry's next big headache.
What can the industry do to convince the regulator transparency is not a necessity?
This can of worms was opened in October 2004 when New York attorney general Eliot Spitzer began scrutinising contingent commission payments received by global broker Marsh.
The investigation triggered concerns in the UK that the FSA could soon begin its own Spitzer style investigation. There was much talk of broker transparency models.
But the FSA concluded that the UK broking model was not open to the same level of abuse as its US counterpart, and there would be no investigation. Speculation about commission disclosure fizzled away while brokers concentrated on more pressing compliance issues like contract certainty and treating customers fairly.
A year on, and the FSA now says companies are failing to make inroads on fighting conflicts of interest. In a strongly worded letter to intermediary chief executives the regulator said: "Firms have work to do in order to ensure that they identify and mitigate conflicts of interest more effectively."
To which one outraged small broker responded: "What complete b*******." That is the feeling about the FSA on this issue, particularly from smaller brokers.
Over the top
The regulator says intermediaries must quickly show they have systems in place to identify and mitigate conflicts of interest. This will apply to all intermediaries, from the high street broker to the wholesale national brokers.
But Gary Dixon, Compliance Solutions managing director, says that smaller firms will be hit worse.
"For small firms this is going over the top. A lot of firms are going to be worried." Dixon says. "The January deadline is bizarre because it does not allow time for small firms to put the necessary systems in place.
"The FSA hasn't thought about smaller firms. This letter has come from Hector Sants. He is in charge of wholesale markets - and he is expecting small firms to play by the same rules as the big boys."
Dixon says the largest conflict facing brokers is that they represent the client but are paid by the insurer. Finding a system which would mitigate that conflict could be the biggest challenge.
Though Biba believes brokers should not be prematurely concerned about commission disclosure. Steve White, head of compliance and training at Biba, says: "Provided everybody plays by the plans and principles there would be no reason to change the rules."
It is about making sure intermediaries have systems which "succeed by design rather than by default", he says. This means extending what is meant by conflicts of interests beyond the remuneration issue.
According to the FSA: "Firms often perceive conflicts of interest in too narrow a manner." Firms must make sure they broaden their view, and give the FSA evidence of how they go about doing that. As White says: "It is all about making sure you are evidencing what you are doing."
In its 'Dear CEO' letter, the FSA gives some detailed insight into what it has uncovered during a review into market practice on conflicts of interest. Community Broking Group (CBG) compliance officer Terence Clark welcomes the guidance.
He says: "It is an area which does need addressing." But he admits in doing this "the FSA is opening up a can of worms". The details of the review are not meant to be taken as guidance, but rather to "distinguish between fundamental conflicts".
The regulator says mitigation strategies worked best where "clients were always informed of which insurers have been approached, readily comparable details of all quotes communicated to the client and put to file, and a file acceptance check was carried out post inception."
Retail brokers have "close links" with the insurer, the FSA observed, creating a "greater likelihood" for a conflict to arise. Furthermore, it noted, there existed no system which could mitigate such a conflict.
Those who moderated the risk had in place "robust compliance monitoring arrangements... to improve the impartiality of decision-making arrangements in respect of access to the intermediary's panel".
The message is clear: systems should be working to mitigate conflicts at every stage of the selling process. Senior managers of intermediaries should take note and be aware of these systems.
As 20 January creeps closer, many brokers will be wondering whether commission disclosure will become a reality. The fear is that the FSA is gearing up for a crackdown, and smaller brokers could take the biggest hit
Whether the regulator is properly aiming its arrow is a moot point. What cannot be left in doubt is that the FSA is a regulator intent on making its mark.
If brokers are even perceived to be compromising the client by being embroiled in conflicts, the cosh will land heavily.
The best thing brokers can do is to take the regulator's advice - move quickly on conflicts of interest and provide concrete evidence on how this is being implemented. IT