News...
Is that clear enough?
In part one of our Groupama sponsored roundtable, guests discuss commission disclosure and the thorny issue of transparency. Andrew Tjaardstra reports.
WHO’S WHO ROUND THE TABLE...
François-Xavier Boisseau managing director, Groupama Insurances
Chris Clarke director of insurance, Jelf Group
Gary Dixon managing director, Compliance Solutions
Chris Hannant head of financial crime and market regulation, Association of
British Insurers
Andrew Holman chief executive, Holmans Insurance Brokers
Tesh Patel corporate development director, Royal and Sun Alliance
Mike Slack chairman, Fife Group, and board member, Financial Services’
Authority
Dick Tucker compliance officer, Stuart Alexander
John Warburton sales and distribution manager, Allianz Cornhill
Steve White head of compliance and training, British Insurance Brokers’
Association
Robin Wood chairman, Robin Wood Associates
Chair: Andrew Tjaardstra reported, Professional Broking
Andrew Tjaardstra: “How should the industry resolve the issue of commission disclosure? Are brokers doing enough to inform clients of their entitlement to know what commission their broker is getting?
John Warbutron: The current regime is that there is a request for soft disclosure but which way should they go? Should the regime change to provide hard disclosure? I’m agnostic about that. There are certain benefits to hard disclosure. It will ensure transparency and make the conflicts of interest point mute. However, it creates additional overheads and complexity, such as documentation, and there are some legitimate reasons some brokers would have higher levels of remuneration than others because of the value they add to their clients. We don’t want to see a flat tariff-based structure, which is the risk of the hard disclosure approach. It would be better to have an industry-based solution rather than one imposed by the Financial Services Authority. We should come together on this through the British Insurance Brokers’ Association and the Association of British Insurers. Another point, where there is a more complex remuneration-contingent element, we require our intermediaries to be in a position to declare the maximum amount when asked. For example, we could get up to x% of our gross written premium in a profit-based commission approach and we’re fairly comfortable with that as a way of driving transparency in the current regime.
Tesh Patel: Just to step back a minute, let’s consider what the most
important thing is in protecting customers’ interests. In most cases
it is providing the right coverage at the right price, so how important is
commission in that equation? Having said that, if the customer asks what the
commission is, then it should be disclosed. However, I’m not sure that
disclosing commission rates with necessarily protect the customers’
interests. Brokers should stated in their documentation somewhere that if
the customer wants to know what the commission is, that this information is
available. I’m not sure whether they should print it upfront because
there are different commission rates and we are in danger of confusing the
customer rather than making things more transparent.
Steve White: The question is: how should brokers solve the issue generated
by managing the conflict of being remunerated by the insurer but having a
fiduciary duty to the customer? If intermediaries can demonstrate they are
managing the conflict and they do disclose upon request, then there should
not be an issue for the regulator in terms of changing its policy position.
However, John Tiner has expressed his disappointment that commercial customers
are not asking about remuneration, which almost feels a bit nanny-stateish.
Market-led solutions are preferable to regulatory intervention. And the disclosure
of commission in itself does not remove the conflict. You can still have conflict
even through the way you disclose. If commercial customers are not asking,
is this because they are not interested? And what confidence do we have that
they would understand the answers given? So making customers more aware they
can ask for disclosure is preferable to going down the mandatory disclosure
route, because if the regulator can force this on the commercial market, we
would be hard pushed to stop it reaching the retail sector.
François-Xavier Boisseau: I’m not sure why there’s so much noise about proving transparency by disclosing commission because it is such a complex subject. Just how far do we need to go? Take a direct insurer. Is it going to disclose its marketing spend? Why would there be one regime for intermediated business and another for direct? Do insurers need to disclose their expenses to distribute and manage a product? If so, what does that bring to the customer? There are brokers with claims handling authority and those with policy administration authority, so are they going to disclose their claims handling fees? How far do you go? Focusing on commission is well intentioned but I don’t think we will reach the goal by forcing brokers to disclose their commission as it is only one part of the overall cost to the customers and there are so many other components.
Mike Slack: The big problem is establishing a level playing field. How do you establish one in a retail commission market? I don’t see that happening. What will happen is the direct writers will reveal their huge advertising spend over five or seven years – what’s going to stop them? In other words, the playing field will not be level. There is also huge competition in the retail market and people are simply worried about what the price is, not what they are earning. You don’t go into Tesco’s which makes £2bn, and ask what it’s making on tomatoes – that’s ridiculous. The agenda is being driven by New York Attorney General Eliot Spitzer’s inquiry in the US and the previous chief executive of Lloyd’s, who was having trouble getting contract certainty. In one of the latter’s speeches, he used the commission transparency argument to deflect this difficulty. It would suit the Lloyd’s market to introduce it as there is perhaps a problem in the Lloyd’s market of how it all works and it might have to bring costs down. So it was nothing to do with commission disclosure, it was to benefit the Lloyd’s market. Frankly, I don’t see it working just because you disclose the commission. Perhaps if you are getting 10% on one policy and 20% on the other the client is not going to know the differential in commission in any case, so he could still have been sold the wrong policy on the basis that you told him what the commission was but he would never know you got twice the commission from another policy. I think it can be dealt with by treating customers fairly - that’s the real argument.
Robin Wood: The key to this is treating customers fairly – nothing
else. What’s commission got to do with it? Ultimately what the FSA has
said is that it wants to get round the law, which doesn’t treat customers
fairly, so what it’s going to do from a regulatory perspective is to
say ‘you will do this’ and ‘that’s going to be your
regulatory standard’. Some brokers will need 35% commission to do that
and provide the service. The fact that some brokers get more than others is
irrelevant.
Gary Dixon: I agree with what’s been said, that the conflict is inherent
and disclosure is not going to change the nature of it. We’ve already
seen people at the bottom end of the market who are moving to a fee basis.
If there is going to be disclosure change then we have to have an industry
solution – if not, the FSA will legislate for us.
Andrew Tjaardstra: What is the solution?
Gary Dixon: The industry has a vested interest in keeping things as they are but organisations such as BIBA will be pushing members to take the high road on this and I think some form of voluntary disclosure has to be introduced. I don’t think a lot of commercial purchasers are that interested – they do look for value for money overall and they should be buying on service as well.
Andrew Holman: I also agree but would add that, when dealing with other professionals – accountants, lawyers – you don’t ask them what margin they’re making on their time, you simply want to know are you getting good service and good value. If you aren’t you move. I think it’s exactly the same with insurance brokers and this issue of disclose is a red herring. If the industry tries to set itself up on some moral high ground or the FSA tries to impose something, it’s going to end up like another client money issue, which will be incredibly complicated and a waste of everybody’s time as ultimately the client isn’t really interested in how much the broker earns, just what the price and the cover is.
Dick Tucker: We cover a lot of small to medium-sized enterprise business – small traders and so on. Basically they’re interested in price and sometimes the cover. We know from past surveys that a lot of small traders with employees haven’t even taken out employers’ liability insurance, so at that level what’s important to them is price and getting cover on the books. In terms of complexity, even if we disclose commission now, we have to consider what our profit share is and not only the base commission rate. You then get into work transfer and these people won’t be interested in having the conversation. I think there was a survey by Lloyd’s where most people thought 7.5% was adequate for a broker. The average is around 15% but I don’t know how any broker earning 7.5% could survive.
Mike Slack: And it is a question of survival. If you impose commission terms then brokers will not argue about receiving 8% commission but there will be a side agreement for other fees that clients will then be charged for – you can’t run a business successfully without making money.
Robin Wood: The debate about commission is key to trade associations, regulators and business. It just goes on and on and on – and it has done for 20 or 30 years. As someone who has sat on 800 disciplinary committee hearings and more than 1000 expert cases where brokers have been criticised, in only one of them was the issue of commission raised. It is not simply a question of whether clients are asking about commission – they’re not even questioning it when it’s put in front of them in legal papers when they are suing a broker. The issues are whether they get their claims paid, whether the broker acts competently and if they get the service they require.
Andrew Tjaardstra: As part of Treating Customers Fairly, brokers are supposed
to aggressively advocate for their client, which sometimes means changing
insurers at renewal or even mid-term. Some brokers are experiencing problems
moving large pieces of business, because in doing so insurers have cancelled
their agency. They have subsequently acquired brokers and the same insurers
have cancelled those agencies as well, which is making acquisitive brokers
reconsider the benefits of TCF. How widespread is the problem and what recourse
do brokers have to the regulator? How do insurers plead and should this be
resolved without the FSA’s intervention.
François-Xavier Boisseau: There are enough insurers in the UK for brokers to not be afraid of moving an account from one place to another, so in terms of TCF there are other issues.
Robin Wood: Before this is dismissed, we are getting a lot of reports about insurers that aren’t settling claims properly when business is moved.
“Brokers should move business more frequently, if insurers are providing a poor service.”
François-Xavier Boisseau: Then brokers should name and shame them, without question. Brokers should move business more frequently. I am bothered when I go round the country trying to meet as many brokers as I can and sometimes I hear about insurers providing a poor service. Because they are in a long-standing partnership, however, the business stays with them.
Robin Wood: Steve, what’s BIBA’s view if that happens? We’ve seen three examples of this in the past month alone.
Steve White: Our members should come and talk to us. We have relationships with most of the major insurers and, if necessary, we will go and speak to the insurer if the broker isn’t prepared to.
François-Xavier Boisseau: Have you been confronted with this type of feedback, Steve?
Steve White: We have had criticism of insurers that the claims process is slowed down if the risk is moved in the meantime, which has clearly got TCF issues sampled all over it.
Mike Slack: I would suggest that is an isolated problem.
Robin Wood: It’s not an isolated case, Mike, it’s a growing trend.
John Warburton: What I can’t imagine is that it’s a strategic decision by an insurer. If it were my company and we heard about it, it would be escalated through the complaints mechanism as a priority.
Robin Wood: There are many insurers in the market and they’re not all
like that. You’re talking about a first-class insurance company here
but there are 138 others. This conversation is about the industry generally
– not just the best ones. John, do you think so badly of it that if
one of your brokers came to you and reported it you would assist them in whistle-blowing
and putting it forward, adding your weight to it?
John Warburton: I would certainly assist if it was one of our brokers and
it had an allegation about Allianz Cornhill.
Robin Wood: What about if the complaint concerned another insurer?
John Warburton: From an insurance point of view we would sort it out ourselves but if it were us then that’s where a trade association would come in.
Dick Tucker: It’s a problem for the small broker – does it have the power to do anything? We’re of a size where we can go to any insurer and say ‘this is not good enough’. However, it is different if you’re a two-man band with a small account.
Mike Slack: We could whistleblow in confidence – the FSA does take whistle-blowing very seriously. Believe it or not, it has better whistle-blowing facilities on the general insurance market than it has on most of the others it regulates.
Robin Wood: Gary and I are in a situation where we are training brokers about TCF and Gary may be seeing the same reaction as we do. When brokers learn about TCF, we watch them gradually realise some of the things that are going on and what they put up with. Many say ‘oh, I didn’t realise this came under lacking integrity. We just put up with it as bullying by the insurer’, and they realise they can do something about it.
Gary Dixon: We have seen an increase in incidents of whistle-blowing but there’s a lack of feedback from the FSA. We have to wait for it to come through enforcement and then for it to be published.
Mike Slack: The FSA is quite restricted in what it can say but it does publish its thematic work now, which is helpful. We have to appreciate – and I’m not here to defend the FSA – that this is a new thing for the organisation. It has done just over a year and is going to conduct a review in April of how it has done. I think if you spoke to the people at the top they would willingly admit they didn’t get it all right and they could do better. And as someone who is party to a lot of what goes on, I’d say they are making huge efforts to correct what is wrong.
Post Magazine - BIBA Bulletin April 2006
