As general insurance intermediaries approach a new regulatory regime, it is worth noting that certain existing malpractices within the industry still exist which if conducted under the FSA regime will have dire consequences. The practice of grossing up still exists among the more unscrupulous of practitioners. Recently, I visited a broker who was incensed upon taking over a new client to have discovered that the previous broker had been grossing up, to the detriment of the client.
The practice of grossing up involves the intermediary misrepresenting to his client the amount he is paying to the underwriter for the cover being purchased. If, for example, the broker receives a quote of £1,000 gross for the cover from the underwriter (with his brokerage being taken from this sum) but the broker tells the client the cover cost £1,500, then the broker is misrepresenting the cost of the insurance to pocket the balance of £500. For GISC members this practice is prohibited by more than one of the core principles. In simple terms though, the reality of the situation is that customers have a right to expect honesty from the professionals they work with. Not only would a broker who indulged in such a practice be, prima facie, guilty of misrepresentation, it would also not be fit and proper to be a regulated adviser.
The approaching FSA regime places standards upon all those firms, and the approved persons who operate within them, that are geared towards upholding the FSA's statutory objectives. The primary FSA objectives that are being breached here are consumer protection and market confidence.
What compliance steps could be taken to avoid such problems? Well, as you might expect, there are some simple steps that should be incorporated within any ongoing compliance monitoring programme that would counter the risk of grossing up.
Looking at it from the highest level perspective, more thorough recruitment procedures in taking on staff should go some way to identifying the type of person who might consider taking such an action. Remember, it is important to always seek sufficient references in respect of potential employees.
Once recruited, it is important to have in place suitable monitoring that examines an appropriate level of placing files in order to check, among other things, the terms obtained from insurers in order to reconcile these to those passed to the client. Another step required in the monitoring is to check the audit trail further by reconciling to the cash received from the client (as grossing up never involves a payment other than to the broker unless fraudulent collusion is taking place, which is somewhat rarer). The receipt of a gross premium from a client that is out of kilter with the net amount paid to the insurer is always a warning sign and one that should always be investigated during compliance checks.
The practice of grossing up is, thankfully, a declining one. The sanctions that will be applied by the FSA once under its remit will be severe, reflecting the fundamental dishonesty represented in the practice.