Regulation is demanding more transparency on broker fees and commissions. This week Waltham Pitglow explains what the relevant professional codes require.

Here is an exercise on a current topic that is stretching the minds of most brokers. How much do brokers earn from arranging insurance for their clients? Take an A4 sheet of paper and, without looking any further in this article, write a list of all the ways in which a broker can earn money .Here's a list that I have compiled:

  • Commission from insurer
  • Profit share
  • Overriding commissions
  • Volume commissions
  • Survey risk management
  • Commission from premium financing company
  • Fees from client
  • Introductory payments from alarm companies
  • Payments for introduction of life business
  • Payments from other brokers for the introduction of business you do not place
  • Introductory fees from banks and building societies
  • Payments for the introduction of your customer for a host of other services, such as windscreen replacement, breakdown services, claims services and claims recovery
  • Administration charges
  • Interest on client money
  • Keeping commissions overpaid by insurer (if they are not the insurer's, they might be the customer's and not the broker's)
  • Keeping return premiums due to the customer.If you have any others please send them on an email as I would like to know.Now consider the GISC private and commercial codes.Private code information on costs 3.4: We will give full details of the costs of your insurance, including: Separate insurance premiums for each of the individual products or services we are offering;Details of any fees and charges other than the insurance premium;The purpose of each fee or charge (this will include any possible future fees or charges, such as for changing or cancelling the policy or handling claims).If we are acting on your behalf in arranging your insurance and you ask us to, we will tell you what our commission is and any other amounts we receive for arranging you insurance or providing you with any other services.Commercial code information about costs and remuneration, paragraphs 14 to 17: Members will provide details of costs of each general insurance product or general insurance activity-related service provided;Members who are acting on behalf of a commercial customer in arranging their insurance will, on request, or where they are legally obliged to do so, disclose the amount of commission and any other received for arranging the insurance;Members will disclose to commercial customers any payment they receive for providing to, or securing on behalf of, their commercial customers any additional general insurance related services.I have not quoted the sections in full, so perhaps the next thing you should do is ensure that you have a copy of the GISC codes and study them carefully. If you do not have a copy to hand you can print one from the GISC website, point 1If you are in breach of the GISC rules you could find yourself being asked to put things right. If you don't put things right you could face severe penalties.From a commonsense point of view, applying for FSA authorisation in due course with even a grey, let alone a black, mark against your firm's name might not be a positive message for those case officers who have the job of considering that application.Learning point 2I have highlighted what might be termed the killer clause - " or where they are legally obliged to do so".This is where we turn to the law of agency and other statutes that deal with the way we deal with customers.Frankly, we do not have the space to consider the legal aspects in detail and perhaps the most sensible thing you can do , having compiled your list, is to ask your solicitor what he thinks you are legally obliged to disclose.Just remember that a basic principle of the concept of agency is that you should not make secret profits. An agent must account to a principal for all money received in the course of agency duties.If I have created an air of unease, then you should go to the next stage, which is to document what you are doing and get it checked out by a specialist. If your current procedures are found wanting, put it right before someone comes knocking on your door or takes legal action.Learning point 3Most breaches of the rules are innocent through lack of knowledge (but ignorance of the law is no defence) and this CPD will, I hope, have conveyed the knowledge or stimulated some thought on the matter.However, it is also important to know that there are practitioners who are dishonest in a wilful or reckless manner. And, as they are found out, so all practitioners will become more focused on the weight of responsibility they have towards their customers and the regulators. Here are a few less than innocent possibilities:
  • Asking the customer for more than the insurer's premiums without telling the customer, sometimes going as far as charging IPT on the difference and keeping it
  • Charging a fee on the basis of returning commissions and keeping reinsurance commissions
  • Doing side deals with insurers not to move business
  • Not making a return of premiums due unless a client asks
  • Pocketing premiums and making false declarations under borderaux arrangements with insurers.Ultimately, many of these methods of earning money are fine - as long as you tell the customer when you are obliged to.Further reading We have pointed you to the codes themselves and the Chartered Insurance Institute CIP text book (Code PO3) gives a good basic outline of the law of agency,Remember that GISC members should train staff on the law of agency and Biba training is a good point of contact for modestly priced but high quality training of this nature (contact ).--
  • Waltham Pitglow is an insurance investigator specialising in compliance.
  • This page is edited by RW Associates, specialists in training, competence and compliance. Email to .

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