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[LONDON]The United Kingdom's insurance regulator has stepped up pressure on the insurance industry to find market-led solutions to a number of big issues including broker transparency, conflicts of interests and contract certainty.
The Financial Services Authority has sent a message to the chief executives of brokers in the past two weeks and called on companies to tighten internal systems to comply with rules on transparency of broker fees and conflicts of interests (see page 20).
Last week, the FSA also sent a letter to senior executives of brokers and insurers on contract certainty. While the regulator said it was satisfied with progress made on the industry fix to achieving contract certainty by January 1, it identified areas of poor practice among some brokers (see page 2).
On the question of broker transparency, the FSA has uncovered a "widespread lack" of measures to ensure transparency of remuneration and has warned brokers, yet again, that they must disclose all commissions when requested by buyers.
In a letter to chief executive officers, the Financial Services Authority reminded brokers of their obligation to tell buyers about commission earned on their business, should the buyer ask.
The FSA said that, in a recent study of the market, it had found "a widespread lack of formal process among intermediaries as to what remuneration would be disclosed to a commercial client on request, with not all intermediaries including all forms of remuneration" in their systems.
A spokesman for the FSA said the regulator was sending the letter as a reminder to brokers of the rule that they must disclose to buyers details of remuneration linked to their business.
Under FSA rules, if asked by commercial buyers, brokers must disclose information about any commission received in connection with an insurance contract, "including payments to associated firms, arrangements for sharing profits, for payments relating to the volume of sales, and for payments from premium finance companies when arranging finance."
The FSA announced in October (BIE October 9) that, after a market failure and cost-benefit analysis, it would consider making disclosure of commissions mandatory unless a satisfactory market-led solution is reached.
A so-called "thematic study" of the insurance brokerage sector revealed that most firms have a standard clause in their terms of business agreements, which reminds clients of their right to request information about any commission received in the placing of business, prior to the conclusion of the contract.
Few commercial intermediary clients request commission disclosure, although some have sought a positive declaration from their broker that it is not being remunerated under a profit-share arrangement. In conclusion, the FSA said, it found a widespread lack of formal processes to deal with questions from buyers about remuneration.
In the letter to CEOs, Hector Sants, managing director of wholesale and institutional markets at the FSA, said that boards of brokers should establish and maintain systems to enable them to respond to a commercial buyer's request for information. He added that proper records must be maintained to demonstrate that brokers have complied with FSA disclosure rules.
The U.K.'s risk management association says it is satisfied that most of its members "are asking and getting" information about commissions, in some cases that information is being provided to buyers without them having to ask, its executive chairman, David Gamble, said.
Mr. Gamble said that major buyers in the United Kingdom-members of the Association of Insurance and Risk Managers-"are getting very good support from brokers" on this issue.
In October, John Tiner, chief executive of the FSA, reiterated his call for risk managers to use their buying power and collective "muscle" to force greater transparency and market reform.
There is a feeling in the market that some smaller insurance buyers have been less concerned than their larger counterparts about demanding commission information, sources said.
AIRMIC would prefer the entire market to move towards greater transparency, and avoid the need for the FSA to step in and make commission disclosure mandatory, Mr. Gamble said.
One risk management source noted that the FSA may choose to "make an example" of a firm that is not complying with its disclosure rules, in order to prompt the rest of the market to ensure transparency.
Steve White, head of compliance and training at the London-based British Insurance Brokers Association, said that most brokers are addressing the issues raised by the FSA in its "Dear CEO" letter.
He said that BIBA has issued guidance to its members about managing conflicts of interest.
"The market is becoming more and more transparent by the day," he said. He said that BIBA did not believe that regulatory intervention to make commission disclosure mandatory would be necessary.