Out-Law News 4 min. read
06 Apr 2009, 7:16 pm
Last December, the Financial Services Authority (FSA) challenged the insurance industry to come up with guidance that would improve the standard of information insurance intermediaries give to their commercial customers during the sales process and help firms identify and manage conflicts of interest.
In particular, the regulator wanted the guidance to focus on achieving five "customer outcomes".
These are that commercial customers should have clear and comparable information about the commissions intermediaries receive, the services they provide and the capacity in which they are acting. Customers should also be alerted to their right to request commission information and be made aware where there is a chain of intermediaries involved in arranging the cover.
That guidance, "Transparency, disclosure and conflicts of interest in the commercial Insurance market," has now been agreed by the British Insurance Brokers' Association (BIBA), the London and International Insurance Brokers’ Association, the Institute of Insurance Brokers and the Association of British Insurers (ABI).
Although not compulsory, the guidance has been given special "confirmed" status by the FSA. This means that, before considering taking any enforcement action, the regulator will take into account whether the firm was following the guidance correctly and appropriately.
Formal accreditation will lapse after three years unless the industry successfully applies for it to be renewed. In the meantime, the FSA has warned that it will be reviewing the situation in 2010/11.
In addition to expanding on rules in the FSA Handbook, the guidance suggests wording intermediaries might use to disclose whether the firm is acting for the customer, the insurer or both, the extent to which it will search the market for suitable products and how it will be remunerated.
The model wording on market search, for instance, requires the intermediary to specify whether he will be carrying out a fair analysis of the available market, a search that involves a more limited number of insurers, or offering products from only one provider. He must also disclose when another intermediary has been involved in placing the business.
As for remuneration, intermediaries are only required to disclose how much commission they earn if a commercial customer asks for the information. The suggested template for this disclosure identifies how the firm will be paid – by an agreed fee or by commission – how much that commission will be and any additional commission the firm will earn for arranging premium finance and/or as a result of an arrangement with the insurer, such as a profit share or volume commission.
Where the firm cannot put a figure on this additional, contingent commission, the model wording suggests stating the maximum extra commission the firm could earn in respect of that policy.
"Firms are strongly recommended to use these model wordings unless they would not accurately represent the facts" the guidance advises.
"Model wordings reduce the risk that firms will inadvertently breach the FSA's requirements. They also make it easier for commercial customers to understand the role and approach of one firm compared to another".
Although intermediaries are only required to disclose their commission on request, the guidance advises firms to have written procedures in place to enable all relevant members of staff to respond to such requests promptly and accurately.
Commercial customers should regularly be reminded about their right to request this information and firms should be able to explain the functions they carry out for insurers or other parties.
There is also advice on dealing with potential conflicts of interest between the firm, the insurer and the customer.
"Intermediaries should be able to demonstrate that they have examined their corporate governance, internal procedures and individual senior management systems and controls to ensure that conflicts of interest are identified and appropriately managed," the paper states. "It is not sufficient to have informal management processes and controls to deal with potential conflicts of interest".
Firms need to be able to "demonstrate that the management of conflicts is a live and ongoing activity within the business and one that is championed by senior management and at board level". The guidance suggests making conflict management a standing agenda item at board meetings.
Launching the paper on 1st April, Eric Galbraith, BIBA Chief Executive said he was delighted that the FSA had given the guidance formal approval.
"I hope now that intermediaries will take the industry guidance and make the appropriate adjustments to their processes and practices," he said. "Commercial customers should expect to receive disclosures that are clear and accurate and this industry guidance should play an important part in helping achieve this.”
The Association of Insurance and Risk Managers (AIRMIC), which represents the insurance buyers for about 75% of the FTSE 100, said the guidance provided "useful clarification" but noted that it stopped short of compulsory commission disclosure.
"Nevertheless, such disclosure will be mandatory whenever clients request it, and AIRMIC will be producing guidance for its members on how to request full disclosure and the detailed information that they should be seeking," it said in a statement.
"Perhaps a more critical issue relates to the capacity in which the intermediary is acting," said AIRMIC. "We believe that it is not possible for an intermediary to act as both an agent of the insurer and of the insured at different times during a transaction without risking significant potential conflicts of interest.
"Again, we shall be providing guidance for members to ensure that they can make appropriate decisions relating to their choice of intermediary from a fully informed position," it said.