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Putting one's house in order

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It looks like the European broking community is about to suffer the same uncomfortable regulatory and even governmental attention that it did in the United States after former New York Attorney General Eliot Spitzer turned his attention to the sector.

Until now, European regulators and legal watchdogs have shied away from slavishly copying what many regard as Mr. Spitzer's confrontational tactics.

The U.K. Financial Services Authority is seen by many in Europe as the boldest of the bunch and of course the big European brokers are all based in London. If a serious assault were to come, it would surely come in London.

But, to date, the newly customer-friendly FSA has shown little desire to follow the kind of direct action taken by Mr. Spitzer's office and the Securities and Exchange Commission.

Rather, under the leadership of John Tiner, the FSA has increasingly preferred to let the market sort out its own problems. Hence the obvious satisfaction that the soon to be departing Mr. Tiner showed when announcing the success of his laissez-faire strategy with contract certainty.

He was delighted to announce last week that the FSA was absolutely satisfied that the U.K. insurance industry had achieved what it asked them to do by year-end, and that it was well on track to sort out the remaining problems like legacy contracts.

"A market failure has been largely fixed by the industry without a single new rule being introduced," Mr. Tiner proudly announced.

So with contract certainty sorted, the next big issue on the FSA's reformist agenda is of course brokers and transparency of commissions. At a media presentation hosted by the FSA in London last week, BIE asked Mr. Tiner what the plan is on this critical issue. His response was political, refusing to answer the question because there is a consultation currently underway and telling us we would have to wait for the conclusions like everyone else.

He did, however, concede that this transparency of commission is a lot thornier than contract certainty because of the lack of common and high "economic interest". In other words there is a lot of money at stake and someone stands to lose some.

If we were betting types at BIE we are sure that we would advise backing the probability that the FSA will find that in this case the market will not be able to sort out its own house and feel obliged to take positive regulatory action. Expect compulsory commission disclosure in the United Kingdom.

The warning signs are possibly even bigger in Brussels where the Commission published its interim report on business insurance. The Commission is clearly not happy with the way the market works as a whole and, moreover, dedicated a large portion of its report to the distribution system in Europe.

It said that "certain distribution structures may reduce the scope for competition."

"Some insurance intermediaries can be exposed to conflicts of interest" and that the "lack of transparency of intermediaries' remuneration also reduces the potential for price competition," the EC said in a statement.

It looks like the days of opacity are numbered and the brokers had better start preparing for a bold new transparent world soon.