Two-year study concluded there was no evidence of significant harm from current practises

The Financial Conduct Authority will not impose tighter regulation on the wholesale broker market.

A two-year FCA study into competition in the wholesale broking sector has concluded there was no ’evidence of significant levels of harm that merit the introduction of intrusive remedies’.

The remit of the original report was to find out: How brokers compete in practice and whether they use their bargaining power to get clients a good deal; Assess what conflicts of interest exist, how they are managed and how they affect competition and client outcomes; and examine how broker conduct impacts on competition in the sector.

The study did however highlight several areas of concern that it recommended be addressed: Firms’ management of conflicts of interest; the information firms disclose to clients, and contractual agreements between brokers and insurers which, in a small number of cases, have the potential to limit competition.

In a statement, the FCA said it would work with firms to resolve the outstanding issues highlighted above. 

The FCA said it had used data from 73 brokers and 49 underwriters, as well as industry bodies. 

”This was a significant and in-depth analysis of a sizeable and complex market to determine whether clients were at risk of harm. Encouragingly, we found no evidence that they were but we found some areas with scope for improvement and we will work with the industry to ensure these are addressed,” the FCA’s executive director of strategy and competition, Christopher Woolard, said.

Industry reacts

The news was broadly welcomed by industry bodies, despite some opposition.

A statement from James Dalton, director, general insurance policy said: “We note that the FCA market study has not found any evidence of harm in how the wholesale insurance broker market operates, and is therefore closing its review.

“Brokers play an important part in the operation of a competitive and thriving insurance market, so it is right that the regulator keeps a close eye on the market, continues to promote transparency to customers and takes action where any potential issues may arise, such as possible conflicts of interest.”

Biba chief executive Steve White said: “The fact that the FCA closed this assessment at an unprecedented early stage is a welcome step and validates our view that the wholesale insurance market is a highly competitive place. It is also welcome that the FCA intends to deal with any follow up matters on a business as usual supervisory-led basis.

“There are many positives in the report and our members will be pleased to see that the regulator recognises that the sector meets client demands successfully. We have regularly asserted that this sector provides customers with broad cover, competitive premiums quality paper and a full range of services that clients appreciate. The positive nature of this report reinforces this.”

But insurance broker auditing firm PKF Littlejohn was critical of the FCA decision. 

”We believe that many mid-tier and smaller insurance brokers will be surprised and disappointed by the regulator’s decision to close its market study and not introduce any remedies,” said firm partner John Needham. ”Many brokers expected the review to result in the regulator intervening in what they perceive is an unbalanced market. 

“Despite the FCA’s positive assessment of the industry, brokers can expect the regulator to continue to focus on the specific areas that it has highlighted in the report. In particular, issues such as conflicts of interest and broker remuneration dovetail with the new Insurance Distribution Directive (IDD), so it’s unlikely that these will drop off the FCA’s radar. 

“It will also be interesting to see if one of the unintended consequences of the report may be growth of ever more innovative non-placement-based commissions. Forward-thinking brokers will also pick up on some of the valuable insight into the London market that’s contained in the report and use it for benchmarking and other internal analysis.”

KPMG also welcomed the news, stating: “The FCA has previously proven that it’s not afraid to show its teeth, the fact that it has therefore decided to make this a final, rather than interim report, shows they have real confidence in the operation of the market.

“This will be welcome news for brokers who have been working hard to transform their business models in evolving and uncertain markets. However, it’s clear there’s still work to be done around firms’ management of conflicts of interest, transparency and contractual agreements and every player in this sector will be keen to see progress is made.”

“Lloyd’s welcomes the findings of this market study and is pleased that the FCA has found no evidence of client harm,” a Lloyd’s spokesperson said.

MGAA head Charles Manchester said: “The FCA has found that brokers aren’t working to disadvantage customers and I think that in 2019, that’s absolutely correct, although the picture might have been slightly different 20 or 30 years ago. I think that the FCA has bigger fish to fry in the wider financial services space.

“Ultimately, it comes down to market power and scale; insurers and MGAs who have it are in a much better negotiating position with brokers. Ironically, those that don’t have the scale can sometimes find it easier to say no.”

Christopher Croft, the London and International Insurance Brokers’ Association’s CEO, said: “This study has been in-depth and wide ranging and our members, and other parts of the insurance market, have co-operated closely with the FCA in this detailed look at our industry. It has looked at all aspects of the way business is placed and it would be fair to say has given intermediaries a clean bill of health.

“Our position has always been that customers are benefitting from broader coverage than ever before, on high quality paper at historically low prices – this is the best possible outcome for them in the risk transfer process. This study offers strong evidence to back that view across all aspects of the value chain.

“The fact that this is the final report – a first for the FCA, brings an end to this piece of work and the FCA will take up any concerns with individual firms in the normal course of its regulatory processes. Liiba will continue to work closely with the FCA to ensure a proportionate approach to the regulation of our market.”