FSA rules on conduct of business will clarify the relationship between broker and insurer, says Liz Johnson

Spitzer has stunned the global insurance market with allegations of fictitious quotes, bid-rigging and market service agreements in New York.

But brokers closer to home need to focus now on the new requirements of the FSA in relation to broker remuneration prior to their enforcement from 14 January 2005.

The thrust of the new insurance conduct of business rules (ICOB) is transparency and to this end brokers must take steps to ensure that all communications with customers are "clear, fair and not misleading".

Come 14 January brokers will be subject to the full raft of detailed provisions set out in the rules relating to the way brokers conduct their business.

Of key importance is the requirement for a broker to take reasonable steps to ensure that it does not "offer, give, solicit or accept an inducement" or direct or refer any actual or potential business to another person if, in either case, it is likely to conflict with any duty owed to the customer.

This is broadly defined and deliberately so, for it is intended to prevent any intermediary getting around the rule by arranging for the inducement to be given to an unregulated associate.

Moreover, an inducement is not limited to cash, but includes cash equivalents, commission, goods, hospitality or training programmes: in fact, it can be anything.

The ICOB rules also set out detailed status disclosure requirements.

These include disclosure to the customer of such matters as whether the product being sold has been selected from across the market or from a limited number of providers and, if the latter, whether the broker is contractually obliged to conduct its broking in this way.

The customer is also entitled to a list of the insurers the broker deals with in relation to that product. The broker must also disclose details of certain direct or indirect holdings it may have in an insurance undertaking (and, conversely, any interest such an undertaking may have in the broker).

These rules will ensure that it will be clear to the customer to what extent the broker is tied to, or has any vested interest in, selling a particular product.

Before an insurance contract is concluded, if a commercial customer asks, brokers must disclose the commission they and any associates receive.

While this rule does not apply to retail customers, the FSA has pointed out that rules of agency still apply.

In particular, it is worth remembering that brokers stand in a fiduciary position in relation to their clients and, as such, they are not allowed to make a secret profit.

In any event, if any customer asks a broker what remuneration he is receiving, the broker is obliged by law to tell him. Strictly speaking, this applies to all remuneration, whether paid by commission or otherwise.

The FSA has said that, while it cannot get involved in broker activities prior to 14 January, when it does take over regulation of intermediaries it will look very closely at the arrangements in place between brokers and insurers.

It is also as well to remember that, particularly following such a high profile inquiry as Spitzer's, it may not be the regulator pursuing the broker, but the insured pursuing the broker.

Any insured suffering loss as a result of a broker contravening an ICOB rule could take action under the Financial Services and Markets Act [2000].