Insurance brokerages must do a better job of managing conflicts of interest when dealing with small and midsize business clients, concludes the U.K. Financial Conduct Authority.

The regulator's review finds there is an increased risk of conflict of interest where brokers fulfill multiple roles in the distribution chain and act as an agent for the insurer as well as the buyer in the same transaction.

The London-based FCA, which took over regulation of insurance brokerages in the United Kingdom in April 2013, undertook a “thematic review” to assess how conflicts of interest were handled and to better understand how brokerages were paid in the middle market.

The FCA studied the conduct of seven large intermediaries that operate in the U.K. middle market during the second half of last year and the first part of this year.

As part of the review released Monday, the FCA also surveyed 1,000 small to medium-size enterprises on subjects such as their expectation of whom the insurance broker serves and their brokers' remuneration, among other issues.

According to the FCA, many small-business insurance buyers did not fully understand the role being performed by their broker.

In addition, the FCA said many small buyers were under the impression that their broker was seeking multiple quotes, while this was not necessarily the case.

The FCA said some brokerages relied on disclosure, rather than having systems in place, to address conflicts of interest. In many cases, disclosure to customers often was “very generic and unlikely to meet their information needs or enhance their understanding,” the FCA said.

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The review also found that conflicts of interest were not always effectively managed for “add-on” insurance or services, such as legal expense coverage or premium financing, among other things.

“Small business are experts in their particular field but are often not experienced at buying insurance,” Clive Adamson, director of supervision at the FCA, said in a statement.

“That is why they need to be able to trust their insurance intermediary to act in their best interests. If there are conflicts of interest that are not identified or properly managed, that trust is put at risk,” he said.

“The FCA has had conflicts of interest on its radar for some time now, and this review signals its disapproval of some old-school industry practices, like purporting to act as a client's agent when only taking the risk to one insurer,” Charley Taggart, a partner in the corporate group at London-based law firm Reynolds Porter Chamberlain L.L.P., said in a statement.

“The FCA is very clear that disclosing a conflict of interest to a customer is not enough — brokers will also have to show they are effectively managing conflicts,” she said.

The report can be found here.

The review also found that conflicts of interest were not always effectively managed for “add-on” insurance or services, such as legal expense coverage or premium financing, among other things.

Inexperienced buyers

“Small business are experts in their particular field but are often not experienced at buying insurance,” Clive Adamson, director of supervision at the FCA, said in a statement.

“That is why they need to be able to trust their insurance intermediary to act in their best interests. If there are conflicts of interest that are not identified or properly managed, that trust is put at risk,” he said.

“The FCA has had conflicts of interest on its radar for some time now, and this review signals its disapproval of some old-school industry practices, like purporting to act as a client’s agent when only taking the risk to one insurer,” Charley Taggart, a partner in the corporate group at London-based law firm Reynolds Porter Chamberlain L.L.P., said in a statement.

“The FCA is very clear that disclosing a conflict of interest to a customer is not enough — brokers will also have to show they are effectively managing conflicts,” she said.

The report can be found http://www.fca.org.uk/news/tr14-9-commercial-insurance-intermediaries here.