Regulator ‘aware’ of issues surrounding exclusive broker capacity deals

The Financial Conduct Authority (FCA) has found examples of poor oversight of delegated underwriting authorities and financial crime controls in the London Market.

In a speech to the Insurance Institute of London (IIL) yesterday, the FCA’s director of supervision Clive Adamson also said the regulator was “aware” of the issues surrounding exclusive broker capacity deals.

Poor oversight

Adamson told the IIL that the FCA is looking at building trust and confidence in the London insurance market in four key areas: delegated authorities, financial crime risks, handling claims and managing conflicts of interest.

On the subject of delegated underwriting authorities, Adamson said the FCA had seen recent examples where insurers in the London market had not been performing effective due diligence or oversight of their delegated agents’ responsibilities for customer outcomes and financial crime control.

He said the regulator had seen examples of coverholders and third-party administrators acting contrary to the insurer’s intentions because the insurer has not been clear about its expectations and has not effectively monitored the agent.

It had also seen cases of underwriters being willing to underwrite products through coverholders that they would not write directly themselves, because the product does not fit their ethics, culture or customers’ needs.

Financial crime

Adamson also said the FCA had uncovered examples of poor monitoring of financial crime risks – a particular issue for the London market given its international nature.

He said work done by the FCA has shown that some firms are performing ineffective sanctions screening of policyholders and claimants, as well as taking insufficient care to ensure that their insured interests do not breach sanctions law.

On the broking side, Adamson said the FCA continues to see inadequate due diligence of third-party business partners and commission payments for supposed services.

He said: “While firms may have reacted positively to our previous thematic work in this area, we will be performing more work in this area in the coming year.

“Given the significant guidance and messaging already provided on this, we expect firms to have improved due diligence performed on third parties, as well as payments made to third parties, monitoring and review of expenses, and gifts and hospitality.”

Broker deals

Aligned to the FCA’s work on monitoring broker conflicts of interest, Adamson said the FCA is “aware” of developments relating to broker facilities, such as the exclusive capacity deal Aon arranged with Berkshire Hathaway in March, and the use of alternative capital.

Adamson said: “While we welcome competition and do not want to stand in the way of market innovation, we are alive to the issues this could give rise to, including conflicts of interest.”