In the wake of the Spitzer investigations, brokers and insurers have received some welcome guidance from the FSA. Michael Faulkner reports
' With the Spitzer investigations still weighing heavy on the mind of the UK insurance industry, brokers and insurers have been looking to the FSA for reassurance and direction.
Are contingent commission arrangements, such as profit share agreements, acceptable under the new rules? Will commission disclosure be mandatory? The industry wanted answers; last week the FSA gave some.
Responding to the industry's calls for assistance, the regulator issued guidance on the use of contingent commission and other 'inducements'. Writing to Biba, the ABI and other trade associations, FSA chief executive John Tiner said: "We recognise the importance of firms understanding their responsibilities to their customers."
For the many brokers who feared a knee-jerk response from the FSA to the Spitzer inquiry, the move is welcome.
In its guidance, the FSA confirmed that specific types of agreements will not be banned, nor will brokers be required to disclose all commissions. It also gave examples of how the FSA's rules on inducements will apply and the circumstances in which a firm could be in breach of the regulations.
The FSA said that whether an inducement breaches the rules depends on the context in which it operates, that is, whether it operates in a way that results in customers being treated unfairly.
The guidance also emphasised that the primary burden falls on the broker to ensure there is no conflict of interest with the customer in the way the inducement operates - although it added that insurers cannot escape responsibility entirely.
Lastly, the regulator warned that while non-disclosure to a client of an inducement does not necessarily cause a conflict of interest, it does increase the potential for this.
Stuart Alexander managing director Stuart Reid says the FSA's guidance will be a "big relief" to brokers. "The spectre of commission disclosure is not going to come," he explains.
But he says that the guidance does not go far enough. "It is still up in the air. There needs to be further clarification. For example, are foreign trips with insurers ok?"
Biba regulation and compliance manager Steve White agrees that greater clarity is needed. "As the FSA gets more understanding, that will improve," he predicts. But he says the guidance gives brokers confidence that there aren't arrangements that are no longer allowed.
White says Biba will be providing the FSA with more insight into how brokers are managing inducements. "Biba is looking at providing
further evidence on conflict management. We are talking to insurers, asking what they look for when examining payment arrangements to demonstrate that brokers are managing the conflicts."
He adds that the rules on inducements cannot be looked at in isolation. "Brokers need to consider other rules, such as those on demands and needs statements. These will help brokers to manage conflicts."
Over the coming months, the FSA will be taking a close look at how brokers and insurers handle inducements and the potential conflicts that arise. Following this, the guidance is likely to be formally included within the FSA handbook.
But the matter may not end there. The FSA is likely to make further clarifications once it has seen how the rules work. White predicts: "As a result of this supervisory activity, if the FSA finds something is not working, it will re-consult." IT
What brokers need to know
The unfair inducements rule (ICOB 2.3.2R) prohibits firms from offering or accepting inducements if they are likely to conflict to a material extent with the duty that the firm providing the inducement, or the recipient firm, owes its customers.
The FSA's guidance:
For brokers the main areas for potential conflict arise where either: