FCA thematic review on broker and insurer conflicts. Charley Taggart

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2 FCA thematic review on broker and insurer conflicts Charley Taggart

3 History lesson FSA commissioned review of commission disclosure in 2007 Conclusion of CRA was, disproportionately low benefit to cost but need for greater clarity on who broker acts for Market disagreement BIBA/ LIIBA split Industry led solution put in place guidelines only Recent increased interest from Lloyd s, AIRMIC and the press

4 Background to the review Simon Green, Head of General Insurance and Protection of the FCA, said: Insurance brokers business models have changed radically over the last 20 years. Some brokers have shifted from being straightforward distributors to product designers, underwriters and claims handler, this means that conflicts of interest may be occurring. This piece of work will help us test whether the essential everyday insurance products that those businesses need are designed and delivered fairly and will focus particularly on SME and microbusiness customers. We will look to trade associations such as BIBA and LIIBA to work with us collaboratively as this work progresses. I am keen to explore how insurance brokers identify and manage potential conflicts. The review will focus on payment flows between insurers and brokers, and several aspects of the value chain such as claims handling and management Not looking at standard commissions

5 Conflicts in remuneration (1) The regulation Principle 8 requires that: A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client This is reflected in ICOBS on inducements which provides: This principle [8] extends to soliciting or accepting inducements where this would conflict with a firm s duties to its customers. A firm that offers such inducements should consider whether doing so conflicts with its obligations under Principles 1 and 6 to act with integrity and treat customers fairly

6 Conflicts in remuneration (2) Commission disclosure rule (ICOBS 4.4.1) An insurance intermediary must, on a commercial customer's request, promptly disclose the commission that it and any associate receives in connection with a policy. Disclosure must be in cash terms Commission means all forms of commissions and remuneration, including profit and volume related payments ICOBS is not concerned with the duty to account

7 Conflicts in remuneration (3) The common law rules Deemed client agreement to brokerage where: Client does not pay a fee It is usual for commission to be paid Deemed consent not applicable where: Client pays a fee Other than normal commission In other words If you earn non-standard commission, you need to give the client enough information to enable him/ her to provide informed consent

8 Tom Bolt Lloyd s view I am killing myself to keep you guys out of the papers on this February 2013

9 The Bribery Act 2010 Offers, promises or gives a financial or other advantage Intending to induce a person to perform a relevant function or activity improperly or to reward a person for improper performance or knowing that acceptance would itself constitute improper performance Relevant function or activity includes any activity connected with a business

10 Improper performance Breach of a relevant expectation Good faith Impartiality Position of trust What would a reasonable person in the United Kingdom expect and note the Fraud Act 2006 Section 3: a person is in breach of this section if he dishonestly fails to disclose information which he is under a legal duty to disclose and intends by failing to disclose the information to a make a gain for himself.

11 Types of remuneration Commission Profit commission Volume commission Contingent commission Insurer services/ market services on slip Insurer services/ market services off slip

12 Commissions/ fees for insurer services Services being provided should be defined If not provided, broker should not get paid Should be different to the services being paid for by other commissions Should not prevent a level playing field Should not be steering as a result Should be disclosed if connected to placement

13 Conflicts in coverholder arrangements Remember: a coverholder agreement / DA makes the broker the agent of the insurer and the insurer responsible for their actions The regulation For those advising clients on a fair analysis basis, the rules on panel selection criteria say only that the selection should be based on product features, premiums and services offered to customers, not solely on the benefit offered to the firm Agency law Duty to act in the best interests of the customer and not put self in a position of conflict The guidance LIIBA markets and capacity statement acting for insured or insurer for sourcing product, passing over information, managing a claim

14 Hard-core conflicts Operating multiple binders and placing business into one with best remuneration Brokers disclosing other insurers pricing to binder operator Grossing up Asking markets to no quote Steering/ calls to market

15 Conflicts in claims Where claims authority and profit commission Where a lack of separation between claims personnel remuneration and PC Binding authority underwriting and claims handling carried out by same person and/or client relationship and binder managed by the same person

16 Lessons from the asset manager review what good looks like (1) New products and activities = reconsidering conflicts Periodic reviews of operations for evidence of new conflicts Conflict frameworks jointly developed by the business and compliance Conflicts monitoring should be done by the business and compliance and with boards receiving adequate MI Ensure you consider whether the value and frequency of gifts and entertainment could give rise to actual or perceived conflicts of interest

17 Lessons from the asset manager review what good looks like (2) Good practice in relation to gifts and entertainment includes: Policy imposing limits on value on one event as well as maximum number of events in a given period (aggregate cap) Policy to apply to frequent low value as well as occasional high Travel and accommodation should not be accepted for education or research trips Events attended by partner/ spouse/ family treated as a gift NB: COBS schedule of reasonable non-monetary benefits

18 Golden rules for brokers Integrity, TCF, Conflicts (Principles 1, 6, 8) Quote what has been quoted Offer what has been offered Be transparent about what you earn Don t divulge information to an underwriter at the expense of another Act in the best interests of the customer

19 Consequences of findings Asset manager conflict review resulted in s.166 skilled persons reports and some enforcement cases CEO attestation to requirements and remedial actions likely If regulatory action potential E&O implications and PI policy trigger D&O trigger, defence costs and liabilities? No indemnities for fines or individuals!

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