Commission disclosure - FSA's disclosure decision welcomed

The Institute of Insurance Brokers and the British Insurance Brokers' Association have welcomed December's decision by the Financial Services Authority not to introduce mandatory commission disclosure.

Instead, the FSA is to introduce guidelines in line with Biba's request for brokers to ensure that the right for customers to ask about commission should be disclosed in terms-of-business agreements.

The decision by the watchdog follows years of campaigning, however, in addition to making sure that the customer knows they can ask about the level of commission, brokers need to ensure that the customer is alerted to details such as where a chain of intermediaries exists.

The regulator believes that the costs of achieving customer outcomes "will not be sufficiently material to have a significant impact on competition". Steve White, head of compliance and training at Biba, said: "This decision has been widely acclaimed in the broking sector as a proportionate and appropriate solution, along with a realisation that we are now drinking in the last-chance saloon. The FSA's thematic work, coupled with its commercial customer research, leads the regulator to believe that firms 'could do better' when describing to commercial customers the services they provide and how these will be paid for. This will include a better description of the breadth of searching undertaken on the customer's behalf and others in the distribution chain."

Some brokers warned that there could be more rules to follow. Darryl Clark, group company secretary and risk management director at Towergate Partnership, commented: "We're pleased that the FSA accepts an industry solution, which will go a long way to clarifying the role of an insurance broker. On this occasion, common sense has prevailed. Unfortunately, I think this may only be a stepping-stone in the whole disclosure debate. It seems almost certain that the FSA will impose additional disclosure regulation down the line, which is likely to be unwelcome to brokers."

Pragmatic

The FSA also recognised that many customers do not place a high value on commission information, something that many brokers have been saying for years. It said that half of the customers interviewed were aware of their right to request commission information, with a quarter receiving it automatically and a couple on request. Inevitably, perhaps, the FSA noted that "customers ... placed greater value on commission information as their understanding of remuneration structures increased". The regulator also identified that customers underestimated the level of intermediaries' commission and lacked comprehension of the differing types of remuneration. The study found that contingent commissions represent only 1.5% of brokers' total incomes.

Difficulty

The Canary Wharf-based regulator needs to balance the burdens of more regulation for brokers with giving the customer valuable information. Janice Deakin, corporate sales director at Norwich Union, remarked: "It is often the administration and bureaucracy associated with any potential solutions, when applied to day-to-day dealings with clients, that make a broker's life harder, with little real value to the customer.

"We believe commercial customers recognise the value of independent local advice through their local broker and brokers have nothing to hide. The key to a successful, industry-led solution is pragmatism and recognition that brokers, like their clients, come in all shapes and sizes. Independent brokers need to make sure they have sufficient influence in the debate to ensure the solution works for them."

Brokers and associations will now have to work together to ensure that they satisfy the FSA's requests before the regulator responds in 2010-11.

FSA: what it wants you to consider

- Customers should have clear and comparable information about the commissions that intermediaries receive and the services that they provide.

- Customers should have clear information about the capacity in which an intermediary is acting.

- Customers should be alerted to their right to request commission information.

- Customers should be made aware that there is a chain of intermediaries.

(Source: FSA Feedback Statement 08/7).