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'Welcome news' as FCA closes insurance broker market study

The Financial Conduct Authority (FCA) has published its final report on the UK wholesale insurance broker market, finding no need for intrusive market intervention.21 Feb 2019

The FCA's report identifies some areas where brokers could improve their practices, particularly around managing conflicts of interest and in some of their contractual agreements with insurers. However, it has taken the rare step of closing its market study without first publishing an interim report, after finding no evidence of "significant levels of harm that merit the introduction of intrusive remedies".

Insurance law expert Iain Sawers of Pinsent Masons, the law firm behind Out-Law.com, said that the report's conclusions would be "welcome news for the UK broker market".

"Brokers will be relieved to know that the overall conclusions from the report were positive and that the FCA has not found evidence of significant levels of harm to competition that will require intrusive regulatory remedies," he said.

"There will have been considerable scrutiny over the past year and large UK brokers will be pleased that the FCA, while identifying discrete areas warranting further attention, has given their market a relatively clean bill of health. In particular, the regulator did not find evidence of excessive profitability in the market or that larger brokers were earning the highest remuneration rates. This was a factor that was causing some concern," he said.

The FCA began its wholesale insurance broker market study in November 2017, with the intention of understanding whether the market was "working well, and fosters innovation and competition in the interests of its diverse range of clients".

The London insurance market is one of the world's leading centres for large scale, complex commercial and specialist risks, and controls more than £68 billion worth of gross written premiums. It is also a market which has undergone significant recent changes in the view of the FCA. This has led to brokers developing whole new services and business practices for their insurance clients, such as bundling risk through 'facilities' and greater use of data and analytics to drive new revenue streams.

According to the FCA, the market is not generally a "highly concentrated" one, although it found evidence of higher concentration levels in some segments of the market. It found no evidence of excessive profitability or of elevated commission rates or client fees among the largest brokers. The FCA also concluded that insurance clients appeared to be "able to exert a reasonable constraint on brokers".

The FCA found no evidence that 'pay to play', referring to concerns that brokers only placed business with insurers that also bought consultancy services from them, was operating "at scale or that there is any basis for us to intervene at present". It found that there was the potential for conflicts of interest to arise when allocating client risk to bundled facilities, but that not all broker conflict of interest policies were suitably "complete" and did not always set out how conflicts would be managed.

The FCA also identified some concerns around whether brokers were providing their clients with sufficient information to enable them to make informed decisions, and around the use of certain clauses in brokers' agreements with insurers. The FCA will work with firms on an individual basis to address its concerns, and will continue to monitor the market as part of its normal supervision function.

Competition law expert Alan Davis of Pinsent Masons said that it was "notable that the FCA has not identified any substantive concerns about market power on the part of brokers, and said that clients exercise a reasonable constraint on any such market power".

"However, the FCA says it has some potential competition law concerns about the use of certain clauses in contracts with insurers that can restrict competition in certain circumstances, including 'onerous conditions'," he said. "The FCA further explains that its concerns 'mainly relate to clauses similar to 'most favoured nation' clauses or client exclusivity clauses', and mainly in relation to facility placement."

"Though the FCA says that this does not appear to be a market-wide issue as these agreements are concentrated in a small number of brokers, they will be taking steps to ensure 'firm compliance with competition obligations'. It is likely that the relevant firms will be persuaded by the CMA to adapt their contractual practices in order to comply with competition law but if they fail to do so, they could be facing enforcement action under the 1998 Competition Act. In either case, it would be helpful for the FCA to provide more detailed guidance in due course on what they consider to be acceptable from a competition law perspective in relation to these types of contractual restrictions," he said.