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LONDONThe United Kingdom's insurance regulator has stepped up pressure on brokers to fully disclose information on their compensation to their commercial clients.
The London-based Finan- cial Services Authority said frequently there are insufficient measures to ensure transparency of remuneration and again has warned brokers that they must disclose all commissions when buyers request it.
In a letter to chief executive officers of property/casualty insurance brokers sent earlier this month, the FSA reiterated previous market notices highlighting brokers' obligation to tell buyers about commissions earned on their business, should the buyer ask.
The FSA also 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 sent 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 that it would consider making disclosure of commissions mandatory unless a satisfactory market-led solution is reached (BI, Oct. 9).
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 tells 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 clients request commission disclosure, although some have sought confirmation from their brokers that they are not being remunerated under a profit-sharing 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 brokers should establish and maintain systems to enable them to respond to a commercial buyer's request for information. He added that records should 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, and 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 toward greater transparency, and avoid the need for the FSA to step in and make commission disclosure mandatory, Mr. Gamble said.
Steve White, head of compliance and training at the London-based British Insurance Brokers Assn., said that most brokers are addressing the issues raised by the FSA in its letter.
"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.