Hector Sants, the FSA's managing director of wholesale and institutional markets, has warned in an open letter to the CEOs of insurance brokers that it may be forced to take enforcement action if companies fail to adequately disclose commission payments.
In the letter, the FSA disclosed a number of findings relating to broker transparency, derived from a conflict management study conducted earlier in 2006. The regulator found that most intermediaries had included clauses in their terms of business agreements which reminded clients of their right to request information about commissions, as advised by the London Market Brokers' Committee.
However, the FSA pointed out that few clients had actually requested commission disclosure and, as such, there was a widespread lack of formal processes among intermediaries as to what exactly would be disclosed to a commercial client in the event of a request. If a client did ask to see a commission breakdown, any failure to properly disclose would be considered a violation of ICOB 4.6.1R, possibly resulting in enforcement action by the regulator.
These findings are aimed at helping firms comply with disclosure guidance so that when the FSA conducts its cost benefit analysis study in 2007 and 2008 it will be clear whether a lack of transparency in the industry is impairing market efficiency. This in turn, said the FSA, “will inform our thinking on the wider question of whether to mandate commission disclosure.”
