Dear FSA, we don't exploit our customers

The FSA recently wrote to chief executives about conflicts of interest (which surely should read potential conflicts of interest) and attached a summary of the conclusions it drew from visits to some 38 firms. While it is absolutely right that there are potential conflicts of interest in its examples, there are also potential customer benefits too. We believe that such potential benefits should receive a similar public airing.

In formulating these 'alternative' views we have been minded to ensure that the statutory principles to which the FSA is committed are at all times foremost in our minds, namely:

a) Market confidence

b) Public awareness

c) The protection of consumers

d) The reduction of financial crime.

While pursuing its statutory objectives the FSA is also required to take into account seven other factors including:

With all this in mind...

FSA conclusion:
Most ... firms did not have any specific procedures or formal controls to ensure that staff did not solicit quotations from insurers that were intentionally higher (or otherwise more favourable) than quotes provided by other insurers. This conflict may emerge where the intermediary is incentivised to place a risk with a particular insurer, usually because of a favourable commission rate or other payment.

The alternative conclusion could be:
The broker uses a lower quotation from one insurer to 'persuade' the insurer offering the incentive to come up to the mark in terms of cover and price, and indeed improve on the terms.

FSA conclusion:
When arranging commission sharing agreements.... rates of personal commission may encourage the recommendation of insurances based on the earnings potential for the individual rather than the suitability of the product for the policyholder.

The alternative conclusion could be:
The broker uses a lower quotation from one insurer to 'persuade' the insurer with greatest personal earnings potential to improve on the terms he has from elsewhere

FSA conclusion:
Among ... firms there was a greater likelihood of conflicts to exist in respect of close links with an insurer.

The alternative conclusion could be:
Such close links allow both the insurer and the broker to develop mutual trust which results in the insurer taking a more 'account' based attitude to risks presented rather than a strict 'case-by-case' basis of assessment. This results in more favourable terms being available to a wider range of customers than would otherwise have been the case. Better services standards are also more likely to form part of a 'close relationship' arrangement.

FSA conclusion:
Where the intermediary is permitted to place insurers on risk under a delegated underwriting authority, there is sometimes an equivalent claims handling authority. Intermediaries with binding authorities are often remunerated in accordance with the volume and profitability of the underlying business, meaning they may be incentivised to handle claims to the detriment of policyholders.

The alternative conclusion could be:
The presence of the claims settling authority means that small claims can be settled very quickly and efficiently by the broker, reducing the overall cost of claims to the insurer, but at the same time leading to an improvement in the claimants overall level of satisfaction.

FSA conclusion:
Where an intermediary operates a binding authority with a profit commission, there is an inherent conflict whereby business the intermediary knows to have a good loss history may be directed to the binding authority while other business is directed to other markets.

The alternative conclusion could be:
As most binding authorities are rated on their own performance, selecting 'in favour' of the binding authority means that those customers who's risks are placed there will obtain more favourable terms as a result. The FSA conclusion also makes the assumption that 'other markets' are inherently less attractive than a binding authority which will not necessarily be the case.

FSA conclusion:
Many intermediaries in the Lloyd's market operate line slips, usually including profit commission arrangements. There is a risk that business is directed on to the lineslip ...without being shown to the underlying markets separately.

The alternative conclusion could be:
Line slips allow risks which are uneconomical for syndicates to underwrite individually to be underwritten. Their very cost effectiveness also increases their competitiveness from the customers perspective.

FSA conclusion:
An intermediary may be involved in premium financing through ownership...or interest/ administration charge sharing arrangements with such a provider. The risk is that the policyholder may be encouraged unduly to use the premium finance services ...or be obliged to do so through the broker's preferred supplier.

The alternative conclusion could be:
Consumers are very aware of the competitive nature of the finance market - indeed we are all bombarded daily with offers of credit. Most broker arrangements have therefore to be competitive, or the customer will simply opt to finance his transaction elsewhere. With that caveat, close ties to the premium finance provider allows the broker to ensure that an excellent level of service is obtained, along with a competitive rate of interest, and the opportunity for a single credit agreement to be available to the client across a range of policies irrespective of risk carrier.

While these are very specific 'alternative' scenarios there are a number of underlying conditions which make us wonder whether or not the FSA is in fact giving sufficient weight to the two factors mentioned earlier, namely:

We believe the following to be relevant in this respect:
Competition - the current edition of the York Yellow Pages (selected at random) is 1,408 pages long, covering every conceivable trade and service. Insurance is a whopping 114 pages of this - by far the largest single category and meriting its own subsection (the only other headings which merit their own subsections are Restaurants with 9 pages and Weddings with 16.) There is even an advertisement for insurance on the back page!

With competition at such a level, what opportunity is there really for UK intermediaries to systematically disadvantage customers?

Evidence of customer detriment - whilst we accept that there is some potential for conflicts of interest to arise in the current system, we do not believe that there is a weight of evidence to support the notion that customers are actually being exploited.

Profitability - the insurance broking industry is not viewed by the investment markets as a particularly profitable one, nor is there evidence to suggest that any UK insurance broking firms are making excessive profits. Adding further to a brokers cost base will result in either increased charges to consumers, or alternatively less choice, and therefore real and quantifiable benefits have to be assured before such cost increases can be justified.

In conclusion, we are not yet convinced that the costs which are being incurred by the insurance industry as a whole in assisting the FSA in pursuing this particular line of enquiry provide a justifiable benefit to consumers. And surely that, above all else, is what this is all in aid of?

Signatories:
Chris Blackham
Alec Finch
Stuart Love
Paul Meehan
Robert Marshall
Stuart Reid
Grant Ellis