Bark or bite?

There is always some element of concern when the big bad beast is let out of the cage, so to speak, for an afternoon and left to roam.

People's fears were fully justified, it seems, when one of the market's most ferocious animals, namely the head of the Financial Services Authority John Tiner, made his recent appearance before the Insurance Institute of London. There he dropped something of a bombshell by indicating that the UK's regulator is considering doing a u-turn on its previous position and forcing through commission disclosure for insurance brokers.

There is no doubt the pronouncement caught people by surprise - so much so, one understands, that even the British Insurance Brokers' Association was straight on the phone demanding to know what all this was about.

As one prominent commercial broker comments: "Yes we were all surprised... and, if you look at the speech, the section where he talks about commission disclosure doesn't sound very good. It seems like the sort of thing he could have scribbled down on the back of an envelope on the way over."

Rising to the challenge

What Tiner actually said was perhaps a little bit more coherent than such a risible precis gives credit for, and it makes challenging reading for the industry. As he said, "...having allowed the market the space and opportunity for a solution to emerge, because of the diametrically opposed incentives of both sides, it has become increasingly apparent that an agreed industry-led solution is likely to be light years away. As such, we feel the time has come for us to take a more objective and forensic look at the possibility of mandating commission disclosure."

He also said that he is disappointed that the buying community had failed to rise to the challenge he made at the Association of Insurance and Risk Managers annual conference in June. There he had told risk managers that he wanted the market to find its own solution and avoid the need for regulatory intervention.

Naturally, the pronouncement has caused considerable anxiety since it was delivered. After all, the FSA has on previous occasions firmly stated that it was not interested in mandating commission disclosure, and that it would look to the market itself to find a sensible solution to the issue. Besides, it is not as if transparency is exactly lacking from the present arrangements.

After all, under the current rules if a commercial client wishes to know the commission level their broker is working to all they have to do is ask and the broker is obligated to disclose the information.

Of course, there were some voices in the market who did not have a problem with the statement of intent, with Marsh - which has been through the regulatory mill more than most over the past couple of years - perhaps understandably keen to support greater moves towards transparency. After all it has already footed a hefty $850m (£430m) bill, mostly to appease the US regulators. "We believe that all our customers should know exactly what their broker does for them and exactly how much their broker gets paid," said a spokesman for the broker, adding that "the present position is unsustainable," and that "the industry itself needs to act before the FSA forces it to."

The critical response

Yet, while the likes of Marsh may well represent the voice of the upper echelons of the commercial broking fraternity reasonably enough, they are far from representative of the industry as a whole. Therefore, reaction from many quarters of the broking world has been particularly vehement to the FSA's about-turn. Tony Cornell of Cornell Consulting does not mince his words: "He's gone too far this time. My view is that I won't get too upset about it if it's personal lines business, as in some ways you can understand if a member of the public has to be protected from someone making a lot of money out of them, and payment protection insurance has been an example of some people scamming the public. Commercial insurance is different, however. It's the nanny state again. There are 3500 brokers out there, so there's huge competition."

"There are just too many anomalies," he adds, criticising the need for the FSA to attack brokers' commissions alone. "Why does a direct writer not have to declare its overheads?"

He is not the only voice to damm Tiner's words. "I was hugely surprised," says Stuart Reid, chief executive of commercial broker Stuart Alexander. "I genuinely believe it's a non-issue based on the number of requests we've had in the last couple of months - which is only two. I would have thought that contract certainty was a much more important issue to deal with than commission disclosure."

"I'm satisfied the market will be able to sort this out," he adds, lambasting the regulator for attacking the income stream that so many regional brokers depend upon, and also questioning what the wider ramifications of focusing on commission levels could ultimately be. After all, he points out, this could eventually work to the detriment of underwriters as well as brokers. As he comments: "A large number of insurance brokers do a lot of work for insurers that is not charged for, so brokers can legitimately argue that if you are going to disclose commissions then that work also comes into focus, which could mean that such services are no longer provided gratis and insurers could find themselves with a lot more work".

The cost to brokers

Mazars' Mark Grice agrees, indicating that if the FSA does mandate commission disclosure this could add yet more cost to brokers, who may have to curtail many of their existing practices: "Mandatory disclosure will probably lead to brokers unbundling their services. At the moment brokerage can be for a multitude of services and these may well be charged for separately. Brokers also get involved in a lot of speculative pitches for which they receive no return." As he says, "they will need to look seriously at the amount of effort and cost this involves". And the regulator will hit the wrong people, he adds: "It tends to be the larger brokers who get into the conflict of interest issues, particularly in relation to contingent commissions. Medium-sized brokers don't have sufficient market muscle to obtain such commissions."

Perhaps most importantly, he adds, the majority of prospective policyholders "are actually concerned about the total cost of the insurance cover and aren't that concerned about the split between underwriter and broker," he says, also lamenting the fact that "the one area of business where the commissions are notoriously high - travel insurance - falls outside regulation, and is one of the most common forms of insurance to be bought by the man in the street".

However, will the FSA really have the heart to follow through with its threats or is this a warning shot across the bows? Many people feel that it is still not too late for the industry to sort the situation out itself. As Cornell says: "My view is it's a temporary thing and it will go away. It's what Tiner does - he throws a wobbly, gets people to sort it out, then backs off. And why would the Treasury want all this work? And it will be a lot of work."

According to Cornell, there are two main lobbies at work behind the FSA's latest thinking. Firstly, he says, are those institutions that get all their business from brokers and that want a level playing field in the post-Spitzer world. Secondly, he says, insurers are incapable of controlling commission because "consolidators have taken them to the cleaners".

As strong as such lobbying concerns may be, however, perhaps the ultimate solution will be left to the industry itself rather than being forced from on high by the regulator. Such is the view held by Kenneth Underhill, a partner at law firm Reynolds Porter Chamberlain and a specialist in regulatory matters. "I've had conversations with a number of senior brokers in the market recently and the feeling is that the FSA hasn't actually said it will mandate commission disclosure," he explains. "Sarah Wilson at the FSA did a speech soon after Tiner and what she says is that in their analysis they still don't think the retail market needs commission disclosure but in the wholesale and commercial markets they will consider change, and that they will announce in more detail their intentions later."

A difficult area

One can see why the regulator is keen to announce details at a later date. After all, this is hardly the most simple of areas for the regulator to intervene in, which Underhill elaborates: "It's a bit of a minefield. If a lot of wholesale brokers disclose their commission, all they are doing is disclosing commission to another broker overseas. So is that providing a transparent market? My personal view is that an overseas broker is still your client, so there is still a degree of transparency but commission disclosure to insureds is fraught with its own issues. As things stand, if a commercial client wants to know the commission you have to tell them."

"It's such a difficult position," he explains. "What's happened is that the underwriters and brokers have now reached a position where they can't agree a way forward because of the complications round the issue so the FSA feels that if the market itself can't sort it out then it will have to."

However, surely the market has been able to come up with solutions to tricky issues before? Does it really need the regulation of an external force to impose a solution which is going to cause such chagrin for so many and may penalise those in the market who can least afford it, especially given the current cost of existing regulation? Unfortunately for some the answer is no, the market cannot sort this issue out itself. As Underhill comments: "I don't think the market will be able to sort this issue out as the parties are so diametrically opposed - it's either a yes or no answer."

However, there is some hope yet, he suggests. Perhaps ultimately we will end up with a more stratified solution than the market is suggesting. As he explains: "I think we are going to have an interesting 2007. I wouldn't be surprised if the approach adopted by the FSA would be to consider (commission disclosure) for certain classes of business and possibly certain sorts of distribution."

Now that really would be entertaining.