Why isn't the FSA more interested in 'soft loans' between insurers and supposedly independent brokers?

As the old adage says, “neither a lender nor a borrower be” – advice that is being eschewed by an increasing number of insurers and brokers in the UK general insurance market. Insurance Times has uncovered examples of insurers lending six- or seven-figure sums to the independent brokers they work with – secret deals that are rarely disclosed to the regulator, let alone the customer.

Loans between insurers and brokers are nothing new. But it appears they are becoming increasingly common as small brokers find it harder to borrow money from banks, and insurers look for better investment returns than they could get on the open market.

Although most insurers distance themselves from the loans, saying they make them on a very selective basis, there are clear benefits. The commercial boss of one major insurer admits: “If I could give loans to brokers and get a rate of 5%-6%, I would take it at the moment, as they’re pretty secure businesses, and that’s a better rate than I could get elsewhere.”

Insurers also have the comfort of working closely with the borrowing broker, keeping a close eye on their investment, and understanding their business in a way that banks wouldn’t.

Ulterior motives?

But is there a more sinister side? Insurer loans fall into two main categories. The first is a standard commercial loan, with interest rates in line with the banks, and the usual terms and conditions. “There are so many belts and braces that many people walk away,” says one broker.

The second type is sometimes called a ‘soft’ loan, where an insurer lends a broker money to help finance a specific acquisition. Often this is on the understanding that the broker will place a part of the acquired business with the insurer. Interest rates are usually more attractive than anything on the open market. Cynics question how such deals serve the interest of customers.

One broker warns: “Borrowing from insurance companies always has strings attached. There are advantages, but there’s another payment to be made in moral terms.”

When an insurer takes a stake in a broker, both parties must jump through regulatory hoops to prove the deal will not affect the broker’s ability to act as independent agent of the customer. But this is not the case with loans, which are also often governed by confidentiality clauses. None of the insurers contacted for this investigation were willing to disclose the names of all the brokers to whom they had loaned money.

FSA takes a passive role

Aviva is one of the most active insurers in this area. Intermediary and partnerships director Janice Deakin met with the FSA three years ago, to get approval. “Before we started doing anything, we sat down with the FSA and took them through our plans,” she says. “The main thing is that the loan agreement and the trading agreements have to be at arms’ length.”

While Aviva has been proactive in dealing with the FSA, the regulator itself seems to be more laissez-faire. It does not approve the loans, and has no arrangements in place to monitor their impact on trading. When initially contacted by Insurance Times, the FSA merely repeated principles surrounding treating customers fairly and conflicts of interest.

Asked to look into the matter more fully, its press officer later said: “We don’t approve loans, which means I can’t answer many of your questions. In terms of how we ensure such loans don’t impinge on day-to-day business, this is via our day-to-day supervision.”

No doubt the majority of loans are made for sound reasons. But given the scrutiny insurer-owned brokers face, it is surprising that the FSA seems barely aware that independent brokers are borrowing large sums of money from the insurers they place business with, without disclosing the deals.

The lenders getting in on the act

While credit from the banks in general has been drying up, some lenders have been quick to spot the opportunity in the broking market. Among them is Macquarie, which has made numerous loans – to brokers recommended by Aviva and on the open market.

A spokesman said: “With access to capital not widely available from traditional banks over the last three years, brokers instead turned to non-traditional funding sources, such as their insurer partners, for finance assistance.

“This enabled insurers to protect their relationships with key brokers, but gave rise to a number of issues for both the broker and insurer.”

The spokesman refused to confirm how many loans Macquarie had made, but said: “Since entering the UK broker market in 2007, Macquarie has consistently funded brokers with their strategic acquisitions.”

Other active lenders in the sector include Lloyd’s, which backs a number of major brokers, Santander and Clydesdale.