Eighty-six percent of small and midsize U.K. insurance buyers expect their brokers to get more than one bid for the coverage they need, but some intermediaries' structure and revenue sources have resulted in “significant” conflicts of interest, according to a review by the industry's regulator.
However, broker representatives say the issues raised by the U.K. Financial Conduct Authority were just a small part of a broader investigation and found no evidence that brokerages sell unsuitable insurance products.
The London-based FCA, which published results of its thematic review last month, studied seven of the largest intermediaries that serve small and midsize insurance buyers. It did not identify them.
“In some firms,” the FCA concluded, “control frameworks and management information have not developed at the same pace as business models.” Some intermediaries' business structure and sources of revenue “created significant conflicts of interest, particularly where firms or groups fulfilled multiple roles in the distribution chain and acted as agent for both the customer and insurer in the same transaction.”
The FCA, which took over regulation of insurance brokerages from the Financial Services Authority in April 2013, said it focused on smaller business customers that often rely on intermediaries for advice.
“Small businesses are experts in their particular field, but are often not experienced in buying insurance,” Clive Adamson, the London-based FCA's director of supervision, 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 that are not identified or properly managed, that trust is put at risk.”
The FCA said its review found that:
? The risk of conflict of interest increases when intermediaries acted as the agent for the customer and the insurer;
? Some brokers' and agents' internal controls lagged changes in the size and complexity of their business;
? Some intermediaries relied mainly on disclosure to address conflicts of interest, which at times was very generic and unlikely to enhance buyers' understanding; and
? Conflicts of interest were not always effectively mitigated for add-on services, such as legal expenses; premium financing; or in cases where a third party pays for the insurance.
The FCA also surveyed 1,000 small insurance buyers, finding that 86% expected their intermediary to search for more than one quote, but that was not necessarily the case at some brokerages.
“Much of the thematic review points to an inability to prove that intermediaries are in control of the conflicts that might arise,” London law firm Norton Rose Fulbright L.L.P. said in a briefing note.
“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 while only taking the risk to one insurer,” Charley Taggart, a partner at London law firm Reynolds Porter Chamberlain L.L.P, said in a statement.
The FCA review “will alarm brokers, particularly those channeling business through managing general agency structures,” said Charles Portsmouth, a director at accountant consulting firm Moore Stephens L.L.P. in London. Previous reviews, including mobile telephone insurance, resulted in the FCA imposing fines “relatively swiftly” on companies falling foul of the its rules, he said.
The London-based British Insurance Brokers' Association, which said it will continue to work with the regulator, said the review looked at just seven brokerages of about 3,500 operating in the United Kingdom.
The “results need to be viewed in that context,” it said.
“Industry guidance already exists, and we are keen to help members provide further clarity to customers along with the systems and controls and management information required by the regulator,” said BIBA CEO Steve White in a statement.
The FCA said it expects all insurance intermediaries to make necessary changes to comply with its rules.