Brokers are welcoming the industry-led solution on commission disclosure

The FSA has seemed obsessed with improving transparency in the commercial insurance market for years. Only now are brokers beginning to understand how the regulator hopes to achieve this.

After a cost-benefit analysis, a lengthy discussion paper, customer research and a period of “thematic work”, the FSA has backed down from its early threats of compulsory disclosure, leaving many in the market wondering what all the fuss was about.

The regulator has now agreed to accept an industry-led solution on commission transparency. Industry guidance – guidelines on achieving the objectives required by the regulator – are being finalised.

How will this affect brokers in their day-to-day dealing with clients? They simply need to continue what they’re doing now, but with greater clarity and added focus. The industry must prove to the FSA that the methods used in transactions give customers every opportunity to ask the broker to disclose its commission earnings.

Similar to the way they record information to meet the FSA’s Treating Customers Fairly rules, brokers will need to work with precision. The FSA has already set out guidelines on how it will know if its new five outcomes have been achieved.

It says it will survey commercial customers in 2010 or 2011 to gather if they are getting “clear information about the nature of the intermediaries’ services, capacity and remuneration and how they are using it”. Separately, it will begin a period of supervision, testing brokers on the changes they have made to business processes and systems.

The FSA will be keen to see evidence of the guidance prompting customers to ask a broker to reveal their remuneration arrangements. In instances where firms complete transactions over the phone, brokers will need to tell customers of their rights verbally. A written statement will be given if a transaction is undertaken electronically or manually.

Those close to the negotiations on the industry guidance say the costs of implementing the new system will be minimal compared to the huge costs of any FSA-introduced mandatory disclosure. Terms of business agreements are likely to need amendment, but the expense is not expected to provoke great concern.

As with contract certainty, the industry has put forward its own solution. Brokers will learn the details at some point in the first quarter of this year but will hope that, with another two years of FSA deliberation on the cards, this finally settles the matter.

Key points

• Brokers will follow industry guidance rather than being obliged to disclose their commission

• Bigger emphasis on customers' right to find out brokers' commission

• New guidance will add "minimal" cost for firms

• Industry guidance will be finalised and approved in the first quarter of this year

• FSA will assess findings in 2010 or 2011