Andrew Paddick says the FSA may be unduly influenced by EC concerns on commission
I was a commercial broker for 20 years before founding the IIB, and in those two decades only two or three clients ever asked how much my firm would gross for advising on and arranging their insurances. I had absolutely no hesitation in telling them it was 20% on the commercial combined contracts concerned, which they thought was very reasonable compared to their mark-ups on goods manufactured.
I suspect that the vast majority of other brokers in the UK domestic (non-international) sector have had a similar experience.
Quite simply, the vast majority of clients are not interested in broker remuneration in isolation. All they want to know is, what is the bottom line cost of the insurance programme being proposed by the broker?
Furthermore, the vast majority of SME clients do not want to pay their broker by the hour or day, plus expenses, because of the cost uncertainties involved.
In many ways, brokers operate like a pseudo mutual association, sharing the servicing costs across their entire clientele. They might earn a large amount of money placing a big liability risk in just an hour or so, and then spend countless hours negotiating a very difficult risk with a relatively small premium – and negligible commission – for another client. The next year it may be a reciprocal situation.
This is a very important message we need to get across to the regulators, bureaucrats and eurocrats who just do not understand the most significant consumer benefits of this modus operandi.
I mention eurocrats because the recent sector inquiry on business insurance contains some worrying conclusions, which reflect a dangerous lack of understanding of just how the market functions in practice.
There is a real danger, in a worst case scenario, that the European Commission could ban brokers from receiving commission from insurers – this it perceives to be a conflict of interest. Given that about 90% of insurance for small and medium sized businesses throughout the EU is transacted by tied agents, a majority of member states might support such a recommendation. This would have devastating consequences for the UK market.
In the meantime, the FSA could use the concerns expressed at EC level to help it justify the introduction of mandatory commission disclosure, once the current review has been finalised.
I have no problem whatsoever with the full disclosure of commission and all other remuneration arising from the relationship with clients.
In the recent Broker Compliance Cost Survey, produced by consultants for the FSA, three possible mandatory disclosure scenarios were presented:
1. Intermediaries must disclose to clients their remuneration on every contract.
2. The second scenario adds a requirement for detailed disclosure (in cash terms) of all forms of broker remuneration, including profit commission and contingent commission. There is a variant of this scenario called 2B, which presupposes a chain of brokers, whereby the primary broker, retail or client-facing broker, is required to disclose its remuneration back to the insurer.
3. The third scenario adds a requirement for insurers to disclose the total remuneration payable on a contract to all intermediaries throughout the chain, including the primary intermediary. Where a wholesale broker is present, the insurer would be required to pass information to the primary broker which would be responsible for disclosing it to the client. In this way, the client would see the total broker remuneration along the chain, in addition to that of the retail broker.
Broker associations were asked to nominate members to complete four pages of very small print, containing questions and costing estimates relating to the scenarios.
The practising brokers on the IIB board took the view that the questionnaire was “complex to the point of lunacy” and that any results from it would not support a reliable cost-benefit analysis.
For this reason we did not nominate any members and would seriously question any conclusions which may suggest that client benefits will outweigh any cost burdens imposed on brokers as a result of this dubious exercise.
On the face of it, if 1, 2 and 3 were the only options available (dismissing the perfectly satisfactory current law of agency), naturally brokers would opt for scenario 1. The others are something out of the worst mathematical nightmare imaginable.
I have very serious reservations about even mandatory basic commission disclosure on documentation provided at the point of sale, together with pages of FSA-compliant information clients do not read, do not understand and do not want.
Against the background of broker consolidation, it is vital that the profession plans ahead to ensure that today’s young brokers inherit a worthwhile, exciting and rewarding future, when it is their turn to become the leaders.
With this in mind, I will be calling for a top-level summit in the New Year, to further these aspirations by discussing a suitable template for effective broker representation and support to 2020 and beyond. IT
Andrew Paddick is IIB director general