Pre-Biba roundtable

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 Warburton: 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 a moot point. 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.

Tesh Patel: The most important thing in protecting customers is providing the right coverage at the right price, so how important is commission? If the customer asks what the commission is, then it should be disclosed. However, I'm not sure that disclosing commission rates will necessarily protect the customers' interests. Brokers should state in their documentation 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. John Tiner has expressed his disappointment that commercial customers are not asking about remuneration, which 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.

Franaois-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? There are brokers with claims handling authority and those with policy administration authority, so are they going to disclose their claims handling fees? 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 cost to the customers and there are 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, 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. So it was nothing to do with commission disclosure, it was to benefit the Lloyd's market. 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 Financial Services Authority 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 some brokers get more than others is irrelevant.

Gary Dixon: 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. It's exactly the same with insurance brokers and this issue of disclosure 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 and 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: 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, as you can't run a business successfully without making money.

Robin Wood: 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 commission raised. It is not 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 a practice key to Treating Customers Fairly. 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?

Franaois-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 Treating Customers Fairly 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.

Franaois-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: 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.

Franaois-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 Treating Customers Fairly stamped all over it.

Mike Slack: It is an isolated problem.

Robin Wood: It's not isolated, it's a growing trend.

John Warburton: 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 Warbuton: 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 Warbuton: From an insurance point of view we would sort it out ourselves if it were us but if it involved other insurers then that's where a trade association would come in.

Dick Tucker: It's a problem for the small broker - do they 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 whistle-blow 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 Treating Customers Fairly. When brokers learn about Treating Customers Fairly, we watch them realise some of the things that are going on and what they put up with. Many say "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 that this is a new thing for the organisation. It has done just over a year and is going to conduct a review 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. 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.

- To read the Biba roundtable in full please visit the Professional Broking website at www.professionalbroking.co.uk

Andrew Tjaardstra

Reporter, Professional Broking

Franaois-Xavier BoisseauManaging director, Groupama

Chris Hannant

Head of financial crime and market regulation, ABI

Andrew Holman

Chief executive, Holmans

Dick Tucker

Compliance officer, Stuart Alexander

John Warburton

Sales and distribution manager, Allianz Cornhill

Chris Clarke

Director of insurance Jelf Group

Gary Dixon

Managing director, Compliance Solution

Tesh Patel

Corporate development director, Royal & Sun Alliance

Mike Slack

Chairman, Fife Group

Steve White

Head of compliance and training, Biba

Robin Wood

Chairman, Robin Wood Associates.