U.K. Brokers Face Stiffer Disclosure Rules

However, Steve White, head of compliance and training for the British Insurance Brokers Association, said the letter merely represents FSA policy for the past two years. "All they are saying in the letter is that they are reminding firms the FSA could change their mind if they see evidence that the market is not abiding by rules and principles," Mr. White said.

The FSA does not have much evidence now that the market is doing anything wrong, he added.

Still, the letter made clear that regulators are not yet satisfied brokers have everything in order on the disclosure front. "The process for identifying and mitigating conflicts of interest is not, in most firms, sufficiently developed at present," asserted the letter–signed by FSA officials Hector Sants, managing director for wholesale and institutional markets, and Clive Briault, managing director for retail markets. "Firms often perceive conflicts of interest in too narrow a manner, and some firms consider conflicts solely about remuneration."

Not all brokers are shrugging off the latest FSA initiative. Richard Bucknall, vice chairman and co-chief operating officer of Willis, conceded there are shortcomings in the broking community's response to conflict concerns.

"I think it is probably correct that the broking community has not fully developed, formalized and structured the processes for mitigating and identifying conflicts of interest in a way that is easily articulated," he said. "Clearly the onus is on the broking community to address this issue."

Mr. White said brokers have three responsibilities–first identifying conflicts, then managing them, and finally providing evidence to the FSA that they are doing it. "Very crudely, we think that brokers are quite good at the first two, but not necessarily good at the third one, which is having the evidence that they are doing it," Mr. White said.

For the FSA, this is a systems and control issue for firms to have the proper protocols in place, Mr. White added. "There is very little evidence that commercial customers are asking for details of remuneration," he said.

The entire process is as transparent as the customer wants it to be. "The customer only has to ask for it and they will get it," he said.

The FSA letter agreed this was the case, as evidenced by the agency's visit to 38 firms to review their policies. "Intermediaries stated that commercial clients very rarely asked for commission to be disclosed, but that in those instances where the request was made, it was not complicated for the firm to identify and release the commission details," the letter stated.

Mr. Bucknall said Willis has 12 months of experience implementing disclosure policies for clients. "It has not had a material impact on our business, and there would be no further impact in the event the FSA insisted on compulsory disclosure," he said.

He did express concern about the "unlevel playing field" resulting from insurers continuing to pay contingent commissions to smaller brokers. "Our experience is that our smaller clients have not been terribly concerned about our remuneration, and I suspect what the FSA is now looking for is a marketwide response or code of conduct to resolve the matter."

Senior staff involvement in the day-to-day identification and management of conflicts remains the key to a successful program, FSA added. "How does senior management demonstrate there is a regular and systemic review of conflicts both within and across business lines?" the letter asked. "Can the board point to a rigorous method used to identify the drivers of conflicts, the outcomes that need to be avoided and the controls designed to achieve this?"

Conflicts can arise from brokers having too close a relationship with insurers, which can be mitigated by management monitoring unusual placement volumes. "There was, however, little evidence in some cases of formal procedures to ensure that the broker's duty to the client was not being compromised by the relationship with the insurer," the letter stated.

The FSA noted that the issue is of much greater concern in other countries–particularly the United States, where high-profile probes by New York Attorney General Eliot Spitzer revealed instances of bid-rigging and contingency fee abuse.

In the United Kingdom, brokers face no mandatory disclosure threat–even though that seemed possible in the initial aftermath of the Spitzer investigations. While the FSA has regulatory authority over the entire British insurance industry, in the United States individual states retain that right, and so far only a handful have passed laws regarding the matter.

The National Association of Insurance Commissioners passed a model law late last year requiring disclosure whenever a broker gets compensation from both the insurer and insured, but the organization declined to extend the measure to cover all agents and brokers after complaints about how burdensome it would be.

The three top brokers–Marsh, Aon and Willis–agreed to stop the practice of receiving volume-based contingency deals known as Placement Service Agreements from insurers as part of individual settlements with Mr. Spitzer's office.

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"I think it is probably correct that the broking community has not fully developed, formalized and structured the processes for mitigating and identifying conflicts of interest in a way that is easily articulated. Clearly the onus is on the broking community to address this issue."

Richard Bucknall, Vice Chairman & co-COO

Willis

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