Dear Ceo letter says brokers still not fully transparent
The FSA issued a further warning to brokers this week of their duty to disclose commissions to commercial customers.
In a 'Dear Ceo' letter published this week, Hector Sants, the FSA's managing director, wholesale and institutional markets, acknowledged that most brokers had taken steps to remind clients of their right to request information about commissions.
But he said there was a "widespread" failure to ensure that customers received information about all forms of remuneration, such as volume overriders and profit commissions, which a placing broker would not be aware of.
"We expect intermediaries to disclose all commissions paid to an associate [such as an insurer]. They must disclose commission from profit share arrangement or other similar arrangements including commission earned from premium finance companies."
But the FSA's letter was seized on as evidence that the FSA was still not persuaded of the need to make disclosure mandatory.
The regulator is set to begin a review of the market next year to determine whether the level of market failure was sufficient to justify forcing brokers to disclose commission.
One compliance source said: "If the FSA wanted mandatory commission disclosure it wouldn't point out the bear traps."
In a reference to the Spitzer inquiry in the US over market transparency, the source added: "The FSA is aware of the political manoeuverings over the issue. It is sensitive to comments that a US attorney general should dictate FSA policy."
The 'Dear Ceo' letter comes two months after a speech by FSA chief executive John Tiner in which he appeared to move the FSA closer to mandating commission disclosure.
He said there was "gridlock" in the market's attempt to improve transparency and that the FSA would take a more "objective and forensic look" at the possibility of mandatory commission disclosure.
An FSA spokesman downplayed the implications of the letter saying that it was "not an attempt to pre-judge the debate" on the merits of disclosure.
"It is saying there are rules in place that need to be followed."
Biba regulation and compliance manager Steve White said he was "encouraged" by the issues that the FSA was raising.
"They are the same issues that they have been raising for 15 months. Our members are dealing with them."
Mandatory disclosure or not?
It will be some time before the FSA makes a final decision on whether to make commission disclosure mandatory. During 2007 it is to undertake a review to decide first whether there is a market failure, and second whether the benefits of compulsory disclosure would outweigh the costs.
For those against mandatory disclosure, the latest 'Dear Ceo' letter does appear to provide some positive words. Most brokers are including clauses in their Tobas to remind customers of their right to request details of remuneration. It also appears that few commercial clients are asking for the information.
On this basis will the market failure and cost-benefit tests be met? The hurdle is certainly a high one to clear.
Nonetheless, the FSA does sound a cautionary note. Brokers need to ensure that systems are in place to ensure all remuneration is disclosed.
The FSA has given the broker market plenty of hints as to how to avoid compulsory commission disclosure. It's up to the market to follow them.
