FSA still deliberating on transparency

In its snappily titled discussion document, Transparency, disclosure and conflicts of interest in commercial insurance, released in March, the regulator shows that it is still preoccupied with customers that do not ask brokers for commission disclosure and argues that the methodology for calculating commissions may also need to be revised.

In the case of contingent commissions, it is worried brokers are not giving "a likely amount payable" founded on a profit or volume-related basis. The FSA says it believes this could lead to "arbitrage" and that transparency here is essential. It wants commissions to be calculated in cash terms or be standardised, for example on a historical basis, and in order to increase customer understanding it advocates the creation of standard definitions for terms such as 'binding authorities' and 'work transfer arrangements'. The FSA is also concerned that the commission made by wholesale brokers is not included in any clients' requests for commission disclosure. However, the FSA wants only the total amount of commission earned rather than a breakdown of how it is split between the different intermediaries.

Summing up the complications surrounding work transfer, one broker said: "Imagine a council tax bill itemising the services you were paying for."

The regulator also says that "certain business models and remuneration arrangements exacerbate the inherent conflicts that stem from an intermediary's dual role as an adviser to its clients and distributors to insurers".

CRA International, a consultancy commissioned by the FSA to conduct research last year, concluded that 40% of brokers used only a limited number of insurers. The FSA argues that it sees the "search an intermediary provides as a key element in enabling the customer to judge the value of his services", though how they propose to take this forward could prove controversial.

CRA International found "market imperfections" in its study but said the costs of mandating commission disclosure would outweigh the benefits.

One prominent broker told PB: "How is another layer of regulation going to make (the marke)] more efficient?"

A consultation deadline for reply to the document is set for 25 June.