One small step

It would appear that the Eliot Spitzer circus is moving out of town, having played to packed out audiences for months on end. Having been the scourge of the insurance industry over the past two years and one of the most tumultuous forces to hit brokers, it would appear that he now has his sights set on bigger and better things - that is if you count political climbing as a move up, that is. This autumn, the New York attorney general earned the state's Democratic nomination to run for governor in the November elections. Having served in the role of state attorney general since 1999, he will face Republican candidate John Faso in the general election of 7 November.

It would seem that having put on one of the most impressive bear-baiting performances to brokers and underwriters alike, his attitude in what could turn out to be his last few months in his present position has mellowed somewhat. For, while many people were rightly enjoying the delights of summer, his office came to an arrangement which actually has profound - and very welcome - consequences for the industry. The deal concerned was reached with his old adversary, Marsh. What Spitzer said at the end of August was that Marsh may now accept contingent commissions on business where it acts as a managing general agent or underwriting manager. The agreement, which was also agreed with the New York superintendent of insurance Howard Mills, was announced by Marsh in a Securities and Exchange Commission filing.

MGA amendment

The amendment reached on 17 August clarifies the means by which Marsh may act and be compensated as a MGA or underwriting manager, defining such activities as those where Marsh has been appointed by an insurer to be the insurer's representative in connection with the management of its book of business.

According to a spokeswoman for Marsh, the deal "enables us now to engage in profit-sharing with the insurance company for which MGAs place business". The broker said such profit-sharing was discontinued while the Spitzer investigation was ongoing. Clearly, the news is extremely welcome for Marsh, a company that has suffered more than most from the attentions of Spitzer. In January 2005 Marsh and its parent, Marsh and McLennan, settled charges that the broker rigged bids and steered clients to favoured insurers, agreeing to pay $850m (£453.9m) in client restitution and to cease collecting contingent commissions.

Of course, the deal does not purely concern Marsh. Soon after, Willis also received clearance, with Joe Plumeri, Willis chairman and chief executive, declaring his pleasure in the decision: "When working as an MGA, we represent the interests of an insurance company so this change ... is consistent with our position of being paid by our client. It also reaffirms our commitment to full transparency - such that there are no questions as to who we represent. Further, I appreciate the Attorney General's willingness to engage in this conversation to gain a thorough understand of the many nuances of the insurance broking business model." Aon too was also given the green light for acting as a MGA later in September.

Yet it is not only the likes of Marsh, Aon and Willis that will be raising a glass to toast the decision. For this is in effect a regulatory move that enables the wider broking community in the US to carry on with agency business in the way it has done for years. After all, acting as an underwriting agent has long been a key component of the business of brokers, and this decision means that businesses will not have to change their working practices dramatically in this regard.

For all the attention that this latest twist in the Spitzer saga has received in the US, it seems that this side of the pond it has not perhaps had quite the same impact. Granted, regulation in the UK is a very different affair from regulation in the US but developments that start over there sooner or later percolate here. And who would argue that Spitzer has not led to profound shockwaves in the UK, particularly in the London market? It would seem that this seal of approval for agency business should serve to set the minds of UK insurance brokers at rest. After all, if even the ferocious Spitzer is fine with brokers acting as managing general agents and receiving commission in this regard, surely the Financial Services Authority is not going to be overly bothered with these arrangements either?

Interesting decision

For some people the decision taken in New York is an interesting one, and is perhaps indicative of a more contemporary approach to regulation now being taken by authorities in the US and over here, with dialogue very much the watchword, and one that is leading to a middle way in terms of oversight.

This is the line taken by Christopher Warren-Smith, a partner at law firm Barlow Lyde and Gilbert. "In the US, Spitzer was very heavy handed and, in comparison, the FSA has been very light," he says. However, he adds, a key development that has happened since the early days of Spitzer has been a strengthening of the dialogue between the regulators on both sides of the Atlantic. "The two talk to each other a bit more these days, and they are working together more and, where possible, observing things."

That is not to say that this latest decision on agency agreements should be seen as a welcome relief from a regulatory process that has been nothing but trouble for the industry, he is keen to point out. After all, he muses, UK brokers are now going through what happened to independent financial advisers previously, and this may be in the best interests of the industry - as some brokers will find in the long run it gives them a competitive advantage.

As Warren-Smith points out, "the industry was probably helped by what happened with Spitzer and Marsh and this has meant that it has been able to get its house in order perhaps sooner than it would otherwise have done. Yet, for some people, the attitude is firmly that we should not align ourselves too closely with what is happening in the States. Just because Spitzer says one thing about broking practices among US brokers does not mean that we too should feel we are in the same boat."

Stressing the distance between Spitzer and the UK is a line taken strongly by Steve White, head of regulation and compliance at the British Insurance Brokers' Association. "The allegations made by Spitzer in the US have been replicated in the UK," he is keen to stress. "Nothing in the FSA rules prohibit contingent commissions. Yes, they can generate a conflict, but provided that (such arrangements) are identified and managed properly they do not breach UK regulations."

Draconian measures

Biba should be pleased that Spitzer's decision regarding agency agreements bodes well for UK brokers. After all, in 2004 the FSA started looking at the agency arrangements that many brokers have in place with insurers. Any draconian measures by the regulator in this regard could have potentially devastating consequences for many smaller brokers, where agency agreements are a bedrock of their business.

White is clear that brokers have nothing to fear in this regard. "The FSA is out and about looking at agency agreements," he declares, "but in relation to client money and risk transfer". The implication is that the core principle of the broker acting as the agent of an insurer is not itself under threat. Still, there are key figures amongst UK brokers who are a little more anxious about the whole situation. The feeling on the ground seems to be that despite Spitzer being more relaxed, and even if there does appear to be more dialogue nowadays on both sides of the Atlantic, there is still concern that the FSA has not yet finished with the general insurance industry.

Such anxieties are voiced by one London market broker. "You never know what's going to happen next," he comments. "I was at Lloyd's the other week when Tiner came out with all that stuff about commission disclosure, so who knows? They haven't carried though with their threats yet, but it's hardly the sort of announcement we wanted to hear at the moment."

It is true that, on the surface at least, the FSA seems as intent as ever to carry through further profound investigations of the way brokers operate. Contract certainty is a reality that does not look like going away, and it is now clear that commission disclosure is also high up the regulator's agenda. Will agency agreements also follow soon?

For Grant Ellis, chief executive of The Broker Network, there is a concern that unless agency agreements are structured properly, they could be looked at askance by the regulator. "I guess the FSA would definitely have a concern if the individual that was in charge of turning in a profit for the insurer was also in charge of paying claims," he says. "So, is the broker representing the insurer or the customer? That's where the difference lies. What the FSA has been saying with contingent commissions is there's a potential conflict of interest."

Contingent commissions

As far as Ellis is concerned, the danger with all of this is that the smaller brokers might end up being damaged unfairly, when the issues in the public domain are ones that only really affect the very biggest enterprises. "Actually, Spitzer was never about contingent commissions per se," he adds. "It was about the abuse of position through bid rigging at the expense of the customer. However, there has been no evidence of this in the UK, where there are far greater levels of competition. We're not alcoholics with a problem, so why should we change what we have always done? Brokers manage their conflicts of interest very well and always have done."

Nonetheless, he does express a concern that the FSA is still making threatening noises about further regulation of the industry at time when the attitude in the US is becoming much more relaxed about the whole issue of agency agreements and commissions: "It would seem that Spitzer's taken a very pragmatic view and yet Tiner is going the other way, which ultimately the policyholder is going to pay for. It's a typically British approach."

Despite the fears of what the FSA may come out with next, only threatening noises have really been made so far. The hope must be among brokers that in the coming months the regulator will take some lessons from the more relaxed attitude already taken in the US.