Deepening divisions

Like North Korea and the US, the broking market is bitterly divided. The issue of mandatory commission disclosure has created as much reaction as nuclear weapons testing and there is no sign of a rapprochement in sight.

FSA chief executive John Tiner recently announced the regulator will take "a more objective and forensic look at the possibility of mandating commission disclosure".
There have been noises from the FSA that this topic was on its radar, but this is the clearest indication yet that it plans to force brokers to reveal their earnings.

Battle lines are being tightly drawn. And, it seems that finding a market solution is now unlikely. The question is, will a change of rules mean the death knell for many smaller brokers and will this ultimately mean customers have less choice and so get a worse deal?

On one side of the battleground is Biba and the bulk of the provincial broking market; while on the other, much of the Lloyd's market, Airmic and a number of the leading national brokers.

For Biba, the resurfacing of this issue is about as welcome as coming across unsealed plutonium. In May, Biba produced a new wording for its members to be used in terms of business agreements. This reminded clients they had the right to ask their broker what commission was being earned.
Many brokers have adopted this model and it was hoped it would provide the "market solution" the FSA was seeking.

But, Tiner clearly feels it does not go far enough - which begs the question, is there anything Biba and those arguing for retaining the status quo can now do?

Peter Staddon, Biba's head of technical services, insists brokers will continue to lobby the FSA hard and that making commission disclosure mandatory will result in consumer detriment.

"I can understand the regulator's concern when it comes to levels of commission, but it should be focusing on the areas where there is evidence of mis-selling - namely travel insurance sold by travel agents and payment protection insurance.

"Brokers - as intermediaries - are being tarnished by this and I want the FSA to have greater understanding of the role we perform."

Staddon argues that pushing brokers into charging fees - which is what he believes will happen if disclosure is mandatory - will push up the cost of cover.

Vested interests
He adds: "Not only that, but it is nonsense to say finding the cheapest cover or lowest fee means the best product or service. This whole issue is being driven by the US and vested interests in the Lloyd's market.

"Brokers in this country have served their clients exceptionally well for over 300 years and it hardly seems fair for Tiner to be pushing for transparency when he has not mentioned direct writers. They should also be required to reveal their acquisition costs - they spend millions on advertising to win business."

Biba will keep hammering the message home. But, one source within a national broker is critical. "It was obvious the FSA would take action. There is plenty of evidence that contingent commissions are being paid which the customer has no understanding of. Biba should have taken action earlier and told its members, prepare yourselves - you need to find a different way of doing business."

Toby Foster, chief executive of UK retail for Marsh, has not been afraid of sticking his head above the parapet on this topic. He has spoken out on the need for full disclosure on several occasions. He has also taken flak from some regional brokers who have claimed it is rich for Marsh to tell other firms how to act, when it was embroiled in Eliot Spitzer's blitz on corporate wrong-doing in the US.

Since then, Marsh has transformed the way it does business. Foster says: "We're in a market where there are increasing levels of regulation and where customers are more demanding. When these factors are combined, we need to have transparency. We've been an opaque industry and full disclosure is now needed."

He says contingent commissions remain a problem. "We were roundly castigated for these practices. But, this model is still in place in the UK and prevents a level playing field. The current different models brokers are using created a misty picture and this won't go away while earnings are undisclosed."

It is not fair to say the whole of the provincial market finds such thinking anathema. Lyndon Wood, chief executive of Moorhouse Group, says he believes disclosure is inevitable.

"Fees may well need to be introduced. We have a corporate arm where this is well established and with small cases, we charge a policy fee of £35. You need good systems and to profile risks. We don't take contingent commissions but do have profit shares. What matters is that the customer understands where you are coming from."

He adds brokers will need to become more like IFAs in that their services are properly itemised. "It's a different way of doing business, but my advice is that brokers need to get on with it - this is the real world."

For many provincial brokers this is unlikely to be an attractive option and they are incensed by Tiner's pronouncements.

Paul Inskip, general manager of Motor Trade Solutions, comments: "I can't think of a single occasion when a client has asked for disclosure. The current model is not broken, so why try to fix it?"

He believes forcing brokers to adopt different pricing structures will result in less competitive cover and fewer firms. "You could even have a Competition Commission issue. I don't think Tiner should be looking at the regional broking market - this is a non problem."

Competitive deal
Meanwhile, Ian Mantel, principal of Manor Insurance Brokers, asserts: "I cannot believe anyone benefits in buying from the person who values his services the least - and yet this is what this move will create. The client is receiving a competitive deal and does not care how this is broken down."

And, Paul Meehan, group managing director of Smart & Cook, states: "Biba has gone to the FSA with a market solution but there is now pressure from national brokers - which have been involved in lawsuits in the US - to impose the way they now do business on the rest of the market.

"We're in a strongly competitive market and this is what customers want. We encourage them to ask how we are remunerated, but the majority are not interested - they care about the price. These moves are ridiculous and we will do our damndest to ensure our view is heard."

The arguments are impassioned but will the FSA be prepared to listen to both sides when they remain poles apart? IT