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Conflicts of interest – often a tricky issue. Particularly so when trying to navigate the complex relationships between customers, brokers and insurers, where separate regulatory and common law duties apply. Potentially headache-inducing, even. The FCA’s head of General Insurance and Protection, Simon Green, has signalled that there might be scope for a new remedy ahead.
FCA focus on the intermediary market could eventually result in greater clarity for advisers and their clients, but may impact intermediary market activity in the short term while things are under review .
The underlying question is what does the future of insurance broking look like? Simon Green’s message to an industry audience was that ensuring insurance broking is supported by good regulation, and guaranteeing client confidence in the insurance market, must be in everyone’s interests.
What was the focus of the speech by Simon Green?
There were three strands to Mr Green’s message:
Why do the FCA consider that there are trust issues in the insurance intermediary sector?
While insurance broking has not been specifically exposed to the numerous scandals that has beset the financial services sector in recent times (eg payment protection insurance and interest rate swaps) such scandals reflect badly on all financial services firms and insurance intermediaries are part of the bigger picture. In fact, customer research carried out by the FCA indicates customers lack confidence in insurers and see buying insurance as a necessary evil. According to the FCA, customers need to feel their fair and reasonable expectations are at the centre of how the insurance market operates. It is vital, therefore, that customer trust is earned, nurtured and maintained through integrity, fairness and professionalism.
What will re-evaluation of intermediaries’ business entail?
The FCA would be a forward-looking, outcomes-focussed regulator (eg the FCA does not expect firms to be concerned with whether a sale is compliant with a set of narrow rules, but rather whether the outcome is good for the firm’s customer). The FCA expects insurance intermediaries to demonstrate that their customers are at the heart of their business model, with senior management teams responsible for setting the culture of their firms.
The FCA has also given a clear indication that price regulation will form part of its regulatory armoury. The FCA will challenge providers on the value-for-money of their products and services and check that charging and remuneration structures can ensure good outcomes for customers.
Mr Green announced the launch of the conflicts of interest thematic project. What areas of concern does it raise for insurance intermediaries?
The FCA is concerned with potential conflicts where insurance intermediaries receive revenue from both their customers and insurers. At this stage, the FCA says they are not concerned about broking commission in a normal range. Rather, the concern relates to profit share, volume arrangements and other payments received from insurance companies.
The review will focus particularly on SME and micro-business customers.
The review has already caused concern among some commentators. Steven Francis, a regulatory partner at RPC, has stated the investigation could end the practice of brokers receiving payments from insurers as well as clients, which, he said, would cause a massive shake-up of the insurance industry and alter the way insurance policies are sold. However, Mr Francis is of the opinion that the FCA would want to avoid such a radical change, which would be akin to the ban on paying commission for investment products. Instead the FCA would try to satisfy themselves that—despite what is definitely a conflict of interest—brokers are managing the relationships well. Those who came out badly from the review would undoubtedly face enforcement action.
Others suggest that the predicted increase in intermediary consolidation may slow as uncertainty over the FCA review dampens M&A activity.
On a more positive note, greater clarification should make life less painful in the end.
What do you think?
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