The debate on commission disclosure has been marked with brokers’ attempts to avoid regulation, supported by Biba, insisting that there is no public demand for such a move. Simon Burgess reports
There are many things that the insurance industry does that it can be rightly proud of. Unfortunately, there are other practices currently prevalent in the industry that are downright wrong, flying in the face of the regulator’s drive to treat customers fairly.
The debate on commission disclosure is one of those issues currently shaming the industry.
The key theme among a majority of insurance brokers seems to be how best to avoid compulsory commission disclosure. This is diametrically opposite to the debate that we should be engaged in – and that is how should we best advertise to customers just what commission we, the intermediary, is making when we carry out any insurance transaction on behalf of the client.
That’s the crux of the matter – the broker is acting for the client in negotiations with the insurer. This is a transaction that demands transparency.
Unfortunately, too many brokers are acting in the interests of the product provider and themselves rather than the customer. They have be-come so used to being paid hefty commissions for recommending one product over another that it becomes second nature to push the customer towards one product at the expense of another, possibly more suitable product.
This is a scandalous state of affairs and one in which we are all, to some degree or other, complicit.
The vexed commission question has also sparked a debate that has split the industry. There are factions within the UK insurance market in favour of hard disclosure– the London market for one. There exists a separate set of circumstances why this should be the case, not least the pressure from across the pond.
On the other hand, you have the provincial broker that worries about his continued existence should he be forced down the disclosure route.
Offering support is Biba, agreeing with some brokers that there is no demand from the public to reveal commission terms, no problem exists and the market is functioning well. Others insist they are treating their customers fairly by courageously agreeing to reveal the commission terms – should the customer ask about them.
Biba’s Steve White was quoted recently as saying: “the number of times that customers actually ask the question you can count on the fingers of one hand and still have enough spare fingers to be rude”.
What is rude is treating customers with contempt by not declaring at the outset just how you are being paid for the work and how much you are being paid.
It could also be said to go against the spirit of the treating customers fairly provisions, so this makes this statement from the head of the compliance team in the country’s biggest broker trade body even more contemptible.
Biba will point to the terms of business agreements wording that promises the customer that the broker will annually remind the customer of their right to ask about commission. It also reminds the customer that they have the right to ask about commission at any stage during the insurance year.
They then devolve responsibility of highlighting this position into the hands of the individual broker. Why not state clearly that Biba members should volunteer this information at the earliest possible opportunity? What are they trying to hide?
At the recent Biba conference we heard chief executive Eric Galbraith slam the FSA for having the temerity to even launch a review into commission disclosure, accusing it of taking a “backward step”.
The only thing backward is Biba’s refusal to recognise that a problem exists.
The regulator insists it does not have a pre-arranged position over the issue of commission disclosure, believing both a market failure analysis and cost benefit analysis would need to be passed before it even proposed mandatory disclosure.
To my mind this represents a failure on the regulator’s part to adhere to the remit enshrined in its establishment as a consumer protection body. Surely every customer purchasing any good or service is entitled to know how much that good or service is costing?
Let us openly admit that obtaining commission for recommending clients select a particular product is a legitimate way of conducting business. In some ways it is better than asking for an upfront payment, as this can prevent those unable to pay both a premium and broker service fee from obtaining cover.
But let’s be upfront about it. Doing so will not lead to the overnight destruction of hundreds of provincial insurance brokerages; after all, estate agents have been declaring their commissions for years and there is surely no high street in the country without at least one estate agent.
Then there is the issue of fee-based remuneration. The size of cases being written on a fee basis is coming down and there is a possibility that smaller brokers could suffer should this trend persist. This is a question of resources and if this is the direction that the market is heading then business restructuring could be required.
However, much more likely is that it is a question of the broker selling in the services that they provide. Both fee-based and commission remuneration models have merit. The fact is that insurers use brokers as their distribution arm and want to obtain business.
The way to do that is to provide commission to the broker to actually distribute and grow that business for them.
Insurance intermediaries are aware that is how the relationship works and so should the clients be.IT
‘ Simon Burgess is managing director of British Insurance