Marsh's decision to overhaul how it discloses its commission and fees has reignited the debate between brokers about the need for greater transparency. Michael Faulkner reports

' Embattled broker Marsh has announced sweeping changes to its business model. Under the threat of potentially disastrous criminal charges, the company says "significant" changes will be made to the way in which commissions are disclosed.From January 2005, revenue streams will become "100% transparent", with all revenue, including fees, retail commission, wholesale commission and any premium finance compensation being fully disclosed to clients. Marsh will insist that insurers show commission rates on all policies and disclose all negotiations with insurers. The move has brought the issue of transparency and commission disclosure to the fore. There is speculation that the rest of the London market will have to follow Marsh's example. "Commission disclosure is inevitable," says one insider. Willis has already introduced a client bill of rights that includes full transparency of commissions and fee payment. But outside the London market, brokers take a different view, saying that commission disclosure will not become the market norm. "It doesn't necessarily follow that pressure to change will hit the provincial market," says one regional broker.Another broker adds that the markets in which national and regional brokers generally operate are different. National brokers tend to concentrate on business with premium income of £100,000 or more, and mostly charge clients a fee. The majority of regional brokers' business is worth less than £100,000 and commission is charged. "But where those two markets touch it might happen," he says. The Spitzer investigation has thrown a spotlight on all types of enhanced commission, such as profit share agreements that exist between many insurers and brokers, some of which also include volume targets.Marsh, Aon, Willis, JLT and Heath Lambert have already denounced the controversial contingent commission arrangements, or placement service agreements (PSAs), under which extra commissions are received if volume targets are met.But regional brokers defend their rights to receive additional commissions because their deals are based on the profitability of the business, rather than just the amount of business placed, and brokers deserve to be rewarded for this. One regional broker says: "If we put quality business with an insurer and it is profitable, it seems perfectly fair that we share in that profit." Another says: "The FSA is aware of profit shares and inducements. But they decided against disclosure."Insurers are circumspect when it comes to increased transparency. Brokers have been told by insurers to "stop panicking, shut up and wait and see what happens," according to one broker.Zurich, for example, while acknowledging that increased transparency is "a good thing", is refusing to say whether it will want to disclose commissions. "All parties – broker, insurer and client – need to be comfortable with that arrangement," says a Zurich spokesman. "It is too early to comment on this," he concludes. Other insurers are equally tight-lipped about the matter. But what of the end customer, the buyers? Do they want greater transparency? While Airmic is surveying its members on the concerns over the use of PSAs, risk managers at international businesses say that the insurance market needs to be more transparent. "The whole issue of commission needs proper consideration as a market issue," says a risk manager of a large multi-national company, who is also a Marsh client. Nonetheless, he does not seem overly concerned about commission levels: "I know my Marsh teams and have a good idea of the income levels. I always ask the questions [about commissions and fees]."As for the FSA, it is watching the unfolding events in the US with great interest. Chief executive John Tiner is reported to be meeting New York attorney general Eliot Spitzer to discuss the allegations of bid rigging and improper commissions. He is particularly keen to be fully briefed on the possible impact of the Spitzer probe on UK brokers, ahead of taking responsibility for regulating the UK broker market in January 2005. Once statutory regulation comes into force, the FSA's rules on inducements could ban the use of PSAs and other commission arrangements. The rules will ban inducements that would lead to a conflict of interest with the client and would be likely to cause material loss or damage to the customer. The FSA is not prepared, at this stage, to say whether PSAs and other forms of enhanced commission will be outlawed under the rules. But a spokesman confirms that the regulator will be keeping inducements under "close advisement" over the coming months. IT

Is Marsh vulnerable to an offensive from the smaller UK broker?Marsh's future remains uncertain, despite the resignation of Marsh & McLennan Companies (MMC) chief executive and president Jeffrey Greenberg, and fending off criminal charges in the US. "I don't see how Marsh will survive. The reputation damage is unquantifiable," says one senior London market source.Following concerns over the firms profitability without the income of PSAs, Standard & Poor's reduced MMC's credit rating from A+ to BBB+. This was followed by Moody's, which lowered the group's senior debt rating from A3 to Baa2. One London market source says: "Marsh could run out of money fast."Since Spitzer first levelled his allegations, competitors have been licking their lips, eager to take advantage of the unfolding situation. With Aon also caught up in the controversy, Willis sees many opportunities to take market share of both Marsh and Aon. And the next tier of brokers are also queuing up to win business. Ri3k chief executive Alex Letts says: "Without PSAs the larger brokers need a new revenue stream. It also allows the likes of JLT, Benfield and Arthur J Gallagher to move forward on an equal footing with the big brokers who had the clout to demand commissions."Regional brokers are also moving into the hunting ground and view the Spitzer inquiry as a good thing. Many admit to "going after" Marsh clients.In what appears to be an effort to ring-fence the UK business from the US, Marsh UK has brought in law firm Freshfields to conduct an internal review of the business. One corporate lawyer says that it's too early to say whether this will work. Many in the market say that teams will begin leaving Marsh, and there are brokers eager to pick them up. There is also speculation of a management buy-out of the UK business, but others have questioned how attractive the business will be to venture capitalists. Risk managers' perception of Marsh UK remains good. One Marsh client says. "It has not raised questions about our relationship with Marsh's UK business. Although, if I felt bid-rigging [as alleged by Spitzer in the US] was institutionalised it would be different."He is also unconcerned by the downgrading of Marsh's credit rating, but admits it may be cause for concern if it falls below its current level. "We have guidelines as to the credit worthiness of the companies we deal with."Over the coming weeks, reassuring clients and investors will be high on Marsh's priorities.

Marsh's contract pre-reformIn the Marsh market service agreement, the contract between broker and underwriter is agreed on "eligible lines of insurance". This is where "the broker becomes eligible to receive remuneration on all business covering primary and excess liabilities placed by the broker with the underwriter".The broker also offers additional services to the underwriter, which include "collection and distribution of premium; and credit control/credit vetting costs".In certain cases, claims handling, marketing and general administration services are built in to the deal.For the "carrier services", the underwriter agrees to pay the broker "6% of net premiums placed with the underwriter... during a 12-month period".In excess of £2.5m business placed with one contract, Marsh would have been paid a commission of 10%.