Conflicts of interest - Conflict-proof contracts

I have been looking at the latest industry guidance on commission disclosure and conflicts of interest; it says that brokers can sometimes be agents of the insurers. As far as I am concerned, I always act for my client. Can you explain?

This is an area that can give rise to misunderstanding, is given high profile within the recently issued guidance that you refer to and is one where all brokers need to check their terms of business agreements in order to ensure that the service that they provide to clients is correctly reflected in the TOBA.

Let us take a typical scenario. You have been appointed by a new commercial client and you go to the market to obtain quotes for the various covers needed; you do this acting as an agent for your client. Under common law, you are required to:

- Act with due skill and care.

- Act in good faith.

- Act within the scope of the authority granted.

- Act in accordance with the best interests of the principal, the client.

Yet, what if the best deal is with an insurer with which you have an underwriting agency agreement or a binding authority, to give just two examples of where insurers extend facilities to brokers.

If we place the business with that insurer, at that point we become agent of the insurer and there must be an immediate conflict of interest. It is not that it cannot be done; it happens every day.

However, what it throws up is a conflict of interest that must be identified and managed and there is clearly an issue of disclosure to the client.

What does your TOBA say? If it says 'we are an independent insurance intermediary that acts on our customers' behalf in arranging insurance', unless that is qualified to state that you can sometimes act for insurers, your TOBA needs changing. Going further, if you offer a contract that is from an insurer for which you are acting as its agent, you must make a contract-specific disclosure. You cannot rely on a generic statement within your TOBA.

Take a second situation: your TOBA says that you always carry out a search of the market before recommending a policy to a client. Yet, should you do this at renewal where the terms from the holding insurer may be, in your professional view, very attractive to the client? Your TOBA needs to make clear the service that you are providing.

Bear in mind that there is nothing in the Financial Services Authority's rules that say brokers are required to have TOBAs. For most, it is a convenient way of outlining the rules of engagement between you and your client. However, you need to ensure on a policy-by-policy basis that it is clear to the client the grounds on which you are offering a particular contract.

Help is at hand: the industry guidance to which you referred has an appendix with a specimen TOBA wording, or if you are not into do-it-yourself, talk to your compliance support consultant.

The FSA's view is that many firms' TOBAs are lacking in this area. If you do change your wording, record when you did it because the FSA will be carrying out a further review next year and will gain some comfort if it sees that firms have responded to the industry guidance.