Same duty different focus

Demands and needs are a feature of FSA regulation that are beginning to show just how powerful a regulatory tool it could become.

Biba has recognised that there are still some brokers who do not appreciate the implications of their duty, not only under the FSA regulations but also in common law, to carry out an effective and compliant demands and needs assessment.

The expression 'demands and needs' has particular meaning in the FSA regulations, but the separate words each also have an ordinary meaning that is consistent with the role of a broker as an adviser to his client.

Double-edged sword

Consequently, many insureds, and many more solicitors engaged in litigating against brokers, are well aware of the power of using the expression 'demands and needs' as a double-edged sword, in the knowledge that they may be able to prove that the broker had not taken enough time and effort to understand an insured's needs.

This in turn would show that the broker failed in his primary duty of care.

The dilemma facing the broker is illustrated in the case of a small private broking firm in a market town, who won the business of a large local engineering factory with a multimillion pound turnover.

The acquiring broker renewed the insurance "as expiring" without doing any assessment of the new client's needs.

The insured eventually suffered a loss in connection with a machinery part that had been exported to South Africa and

had failed to meet the buyer specifications.

It transpired that there was no cover for the loss as claimed and the insured was advised to sue the broker.

The broker was unable to show, in its defence, that it had any real appreciation of what its client's business was about.

It knew that the business made machine parts but it had made no inquiry as to what kind of parts, or to where they were exported or the types of clients that typically bought its goods.

Had it made these inquiries the some startling facts about the company's trading relationship with government influenced engineering plants in politically unstable parts of the world.

With hindsight it was clear that the broker was ill equipped to deal with the insured's needs.

On this occasion the broker defended its position in a lengthy 32-page statement. Among other defences it said:

"My client didn't want to spend time talking about insurance."

"The insured has the duty of disclosure; it is not up to us to ask about things that we could not be expected to know about."

"We told the insured they had to tell us everything about their business – they clearly didn't."

"There is a limit to what a broker can do – we don't get paid much now."

"Insurers want only information that fits their inquiry system. Anything else may cause extra work for them and this can lead them to declining a quote."

ICOB 4.3.2 R says that in assessing the customer's demands and needs, the insurance intermediary must "seek such information about the customer's circum-stances and objectives as might reasonably be expected to be relevant in enabling the insurance intermediary to identify the customer's requirements".

Not only does the broker in this case breach FSA regulations but has no paper trail to help with a defence in common law.

ICOB 4.4.7 R, says: "The demands and needs statement is the record that the insurance intermediary must maintain to demonstrate that he has given a suitable personal recommendation. Accordingly, the statement will need to contain sufficient information to act as this record."

Duty of care

What is different about a broker's ordinary duty of care now, as compared with pre-FSA regulation? Not much. There has always been a duty of care but it has never before been coupled with regulation.

The regulation has put a sharper focus on what an intermediary should and shouldn't do and this has made it easier for claimants to benchmark failure on the part of the broker.

The demands and needs regulation applies where the broker recommends a specific policy for the client.

This is then an advised sale.

If the broker does not recom-mend a specific policy but puts a selection in front of the client, or even one policy and then tells them that it is for them to determine suitability, then that is a non-advised sale and they need to advise the client of this. The broker also has a duty to ensure that the client understands what is being said.

There is, of course, not much point in going to a broker for no advice.

A particularly alarming feature of the case, mentioned above, is the broker's reference to insurers wanting only information that fits the computer-driven quotation system.

First, it must not be assumed that this is strictly true but the implication is of great merit for future consideration by both brokers and insurers.

If the nature of an online trans-actional process diminishes the buyer's appreciation of the quality of the commodity or interferes with its ability to understand whether it meets its needs, this will have serious consequences for inter-mediaries in terms of litigation and a breach of FSA ICOBs.

Modern brokers, particularly the younger generation, will be brought into the industry with a great knowledge of the trans-action process but little, if any, of the art of balanced skilled advice.

This is because giving advice must include understanding the subject matter of the risk upon which they are advising. This, by definition, takes time and a level of skill, experience and comp-etence that is not learned at a computer keyboard.

Computer driven transaction is essential for most of the insurance industry's products if insurance is to remain competitive and delivered on time, in accordance with the forthcoming require-ments for contract certainty.

If one of the unintended consequences of commoditisation is that brokers fail to meet the demands and needs of the buyer, the hidden cost to the insurance industry will be incalculable.

Not only will it damage the industry's reputation but it will also lead to serious gaps in the indust-ry's distribution mechanism, as intermediaries take to the hills and refuse to give advice of any kind, in an attempt to avoid being sued. IT

Roger Flaxman is managing director of Flaxman Partners