Regulator consults on three options for managing disclosure to commercial customers, as BIBA calls on brokers to respond.

Regulation of the UK commercial insurance market could increase significantly following a long-awaited FSA report on commission disclosure and potential conflicts of interest.

The FSA believes that the market is currently failing commercial customers by not being transparent enough, and has set out three possible ways of tackling this. While it says that it would prefer a market-led solution, the watchdog has made it clear that it would be willing to introduce new and stricter regulation.

It has sent inspectors out to the market to check whether brokers are meeting the current requirements around disclosing commission and managing conflicts of interest. It also plans to ask commercial customers what information they receive and how valuable it is.

The watchdog claims that the market is unable to decide for itself whether brokers should be forced to disclose the commission they receive to commercial customers, because opinion within it is polarised. For example, international brokers that have been forced to disclose their commission in the US favour forced disclosure in this country, whereas regional brokers tend to oppose it.

The FSA has laid out three options for the future:

• Increased FSA supervision and additional requirements for brokers to supply information to the watchdog.

• An enhanced version of the current regime, whereby brokers disclose their commission to customers who ask for it. Under this option, the information provided on request would include details of contingent commissions and any deals the broker had in place with insurers – for example, a tied agency.

• Forced commission disclosure, whereby brokers would have to tell all customers how much commission they were making, including contingent commissions, and about any relationships they had with insurers.

The market has until the end of June to respond. The FSA will then develop final proposals and may draft new regulation at the end of this year.

BIBA called on its members to seize their chance to influence the FSA. Chief executive Eric Galbraith said: “While we are disappointed that the lengthy and costly forensic review in 2007 did not bring about closure on these issues, we will now contribute again to the debate.

“These are important issues and we would strongly recommend to all firms that have an opinion on these matters, whatever that opinion may be, to respond formally to the FSA. BIBA will itself be preparing a detailed response in consultation with its members, as we have throughout this drawn out process. It is our view that greater transparency for commercial customers can be achieved by the market of its own accord and we do not need further regulatory intervention.”

The report is the latest step in a lengthy process. It coincides with an investigation of the commercial insurance market, and commission disclosure in particular, by the EC Competition Directorate.

It follows a report, commissioned by the FSA last year, into the potential costs and benefits of forcing brokers to disclose commission. It found that any such regulation would cost the market a one off lump sum of £87m, followed by a further £34m of ongoing costs. These would be split between insurers, who would bear 45%, and brokers and other intermediaries, who would bear 55%. The consultants found that such regulation would benefit only a fraction of commercial customers.

However the FSA believes that consolidation in the broker market, and such arrangements as managing general agencies, risk conflicts of interest. It believes that greater transparency on what money brokers receive and why, and what business arrangements they have in place with insurers, would mitigate that risk.

Have your say on the FSA

Hector Sants is getting heavy. As if the burden of red tape were not already enough for brokers to deal with, his snappy watchdog is now threatening to either step up its enforcement of the existing rules, or introduce even more onerous ones. Given the years of wrangling over this, that is hardly a surprise. But by now many are heartily sick of the debate and hardly care how it ends. Certainly the very customers whom the FSA is meant to protect seem uninterested.
So why has it bothered? Well, the regulator, which despite recent events prides itself on being the best financial watchdog in Europe, is under considerable pressure from our Continental cousins. With the European Commission actively investigating commission disclosure, the FSA does not want to seem behind the curve. Add to that the chain of events in the US put in motion by the now-disgraced governor of New York Eliot Spitzer, which led to the international players cleaning up their act and fully disclosing commission, and there is some serious pressure.
The FSA is also worried by the recent blurring of the distinction between brokers and insurers, what with insurers owning brokers, sometimes partly, sometimes outright, and the new enthusiasm for managing general agencies and other arrangements which see brokers’ independence eroded. Any murky arrangements would be blown wide open by a requirement of full disclosure – or even the knowledge that such information had to be provided to customers on request.
But despite all these drivers, the FSA has been dragging its feet since 2005. Even if it does decide new rules are necessary, it won’t even consult on them until the end of this year, meaning they would be unlikely to come into force in this decade. What does this tell you? The FSA has many other things on its mind and seems reluctant to act. Now it’ is up to the market to convince it that it does not have to.
Over the coming weeks, Insurance Times will be working with you to make sure the markets message gets through, and to demonstrate to the FSA that the market is able to regulate itself.
Send your thoughts and opinions to us at and we will make sure your voice is heard.