Modern market conditions are also increasing the potential for
conflicts of interest. Traditional distinctions between insurers
and intermediaries are becoming blurred by the trend for insurers
to buy stakes in broker firms and the frequency with which
intermediaries now carry out functions for insurers under delegated
authority agreements.
The regulator wants to make sure that commercial customers are
given clear, comparable information about what intermediaries do,
how they are paid and any conflicts of interest that might
arise.
Current rules require intermediaries to disclose the commission
they earn to commercial customers, but only on request.
In December 2007, an independent report by CRA International
found that medium-sized businesses in particular are often unaware
of their right to ask for this information. And the FSA's own
investigations have found many intermediaries are uncertain about
what they must disclose and how best to do it.
The FSA believes commercial customers should be able to find out
the full cost of broker services, including remuneration earned by
any other intermediaries in the distribution chain, and the likely
extent of any contingent commission (additional commission earned
by bringing business to a particular insurer).
Any changes to the current regime would be backed up by improved
measures for managing conflicts of interest and an education
initiative aimed at helping commercial customers understand the
value of commission information and how to use it
effectively.
Options
The discussion paper puts forward three options for reform,
although the FSA says it is "keen to encourage a market-led
solution if possible".
The first suggestion is for more rigorous enforcement of the
existing rules – with some added guidance from the regulator and
tighter reporting requirements placed on brokers.
The second possibility is to enhance the current "on request"
regime to improve the quality and comparability of the information
given. Under this option, intermediaries could be required to
remind customers at the point of sale of their right to request
disclosure.
The third option is mandatory disclosure. All UK-based
intermediaries would have to provide their commercial customers
with information about the total commission (including contingent
commission) payable throughout the intermediary chain. An
obligation would also be placed on insurers to make sure this
information was provided to the customer.
Draft rules are annexed to the paper "for illustrative
purposes", although the FSA confirms no new rules will be made
without consultation and a full cost-benefit analysis.
In December 2007, the CRA International report advised that the
benefits of introducing mandatory disclosure by itself would be
outweighed by the cost. But the FSA believes this analysis might
change if disclosure was combined with other measures, such as
improving the comparability and clarity of the information
given.
Next steps
The closing date for responses is 25th June 2008. The FSA will
also be carrying out further work with insurers, intermediaries and
customers to consider the nature and extent of conflicts of
interest, how commercial customers currently use the information
they are given and the benefits of improved disclosure.
Feedback from the industry and the results from this additional
work will help the FSA decide whether to make changes to its rules.
If new rules are required, they will be consulted on in autumn
2008.
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