Broker Management Forum

Andrew Tjaardstra: Many brokers, when talking about commission and the disclosure debate, compare it to asking Tesco for the mark-up on a pot of jam. Is this fair?

Steve White: To nail this one once and for all - no, it is not a fair comparison. Tesco owns the jam jar and the contents of the jam jar, they are not an agent in this process, it is a simple transaction between Tesco and the customer.

What the insurance broker does is different, he acts as the agent usually of the customer, or sometimes the insurer. So there is an agency relationship in place that makes it a totally different transaction.

Dick Tucker: I would agree. And equally I don't think you can compare brokers and what we do with solicitors and accountants. Solicitors and accountants have expertise in service only, whereas, with brokers, it is not only the expertise in service but it is also selling the product as well, which, as Steve said, is on an agency basis.

Andrew Tjaardstra: Do customers really care about how much commission brokers make?

Dick Tucker: In the past 12 months we have had three clients that have asked us what commission we earn. So, from that there is no evidence that says that they want to know. Despite this, for the past nine months, our terms of business have actually said that if we are asked we will disclose the commission amount to them. We provide those TOBAs in new business and also on every renewal that we issue to clients; so they have every opportunity of understanding that we will disclose that commission yet nobody asks.

Andrew Tjaardstra: Steve, do you believe it is important for the customers to know?

Steve White: Well, I think Dick's comments set the whole argument into some degree of context. He backs up what we have heard anecdotally from our members, that the number of times that customers actually ask the question you can count on the fingers of one hand and still have enough spare fingers to be rude. We obviously need to bear in mind that the process we currently have is as transparent as the customer wants it to be; if the customer asks, they will be told.

Andrew Tjaardstra: Is there any benefit to the client knowing what the brokers' commission is?

Steve White: If customers are not asking that question, despite being reminded in TOBAs that they have the right to, it perhaps says something about how important that information is to them in the buying process. We have evidence from the European wide trade body that represents small to medium-sized enterprises and it is their view that SMEs around Europe do not want to know what the commission is. They are much more interested in the total cost and what the cover is. Those are the overwhelming factors that SMEs take into account in the buying process.

Dick Tucker: Going back to when Financial Services Authority regulation first came into place, the overriding concern was that we actually provide a suitable contract for the client. That we actually provide them what the total price is and to advise them what is the service that we provide, for example, is it through one particular insurer or do we go to the market and produce a fair analysis? So it was in the FSA's mind at that time that actually commission perhaps was not as important.

Andrew Tjaardstra: BIBA has suggested reminding customers of their entitlement to ask about commission in TOBAs. Is this clear enough for the client? Isn't it buried too deep in the documentation?

Steve White: The BIBA TOBA wording comprises of two elements. Firstly is the broker promising the customer they will annually remind the customer of their right to ask about commission. The second part is reminding the customer that they have the right to ask about commission at any stage during the insurance year. Clearly it is up to brokers how they manage the presentation of that information. We are not suggesting it be buried away on page 13 of a 15 page TOBA. We are not a regulatory body but we are suggesting to our members that they do give it some degree of prominence. But remember, TOBAs contain a raft of very important information.

Dick Tucker: We actually place it under a section called Charges. It is certainly not buried within the TOBA. The majority of TOBAs that brokers issue are not large documents, they are usually quite concise. The issue I guess is that for a lot of clients is there has been a lot of paperwork being issued since FSA regulation began.

Andrew Tjaardstra: If the wording within the TOBA reminding clients of their entitlement to know the commission does not satisfy the FSA, is there a Plan B? Or is there anything else within that that could be used to satisfy the FSA?

Steve White: The FSA, in the past two years, since they have been looking at conflicts of interest and issues that spin off that, have identified three problems. First, there are firms struggling to identify and manage the potential conflict of interest that being paid a commission generates. To explain, you have an agency relationship with your customer, if you are not paid by your customer but paid by the insurer, by way of commission, that generates the most basic potential conflict of interest that an intermediary is faced with.

The FSA rules do not forbid conflicts of interest, what they require is that they are identified and managed. BIBA has put out a lengthy guidance paper for members on how to identify and manage conflicts of interest. We have also put out a subsequent paper on how to design and implement your own conflicts of interest policy.

The second problem they raised was this anecdotal story of firms not having a process in place to fully disclose commission upon request. This afternoon dealt we have now dealt with that one.

The third issue that they have raised was about commercial customers not asking about commission. That has been addressed by the change to the TOBA wording. So, if firms are doing all of those three things, we believe that addresses all the FSA's concerns and there will not be a need to mandate disclosure.

However, you must be doing all three of them - carrying on the ways of the past is a recipe for mandatory disclosure. If you don't want mandatory disclosure, manage the conflict, have the process in place to fully disclose, and make sure you are using the BIBA TOBA wording.

Andrew Tjaardstra: Are brokers engaging with the FSA sufficiently about this?

Dick Tucker: The FSA obviously has made up its mind that it is going to investigate this and make a decision. A lot of the discussion has already gone on and we have to sit back and wait now until the FSA have gone through their investigation. Any conversation that either brokers or BIBA have with them at this moment in time is probably pointless unless asked.

Steve White: I agree, the time for collective talking is passed. BIBA continues to have a dialogue with the FSA on this subject. We now need all our members to be identifying and managing the conflicts, having that process in place and using the TOBA wording. That gives us the three pieces of protection that we need to go in and bat with the FSA on brokers' behalf on this.

Andrew Tjaardstra: Michael Jacobs of Proffield Insurance Services asks: "What is likely to be the fallout from compulsory disclosure? Will problems arise when the disparities between broker rates are shown?"

Dick Tucker: Brokers do really need to start thinking about how they are going to tackle this if compulsory disclosure does occur. There is no point in waiting until the day comes and it is announced they need to start thinking about it now. So that could include looking at whether they are going to move to a fee basis/

Andrew Tjaardstra: So you believe small brokers could suffer?

Dick Tucker: There is a possibility that smaller brokers could suffer and it is about the resources to be able to put the effort into identifying what sort of fees they are going to charge. In essence I don't think the actual commission disclosure will be any different for them or for larger brokers, it is actually as a result of having disclosed where you want to go. If you are happy to continue on a commission basis and then it is fine. However, there will be a move to a much more fee-based industry.

Steve White: We are already seeing a move towards more fee-based now anyway. The very large ticket businesses primarily now is being written on a fee basis. The size of cases being written on a fee basis is coming down. Clearly we are more transparent today as a sector than we have been and it is likely that in future we are going to be more transparent than we are now. The circumstances in which brokers talk to their customers about their earnings is going to increase. What brokers need to be mindful of is that when you do start having that conversation with your customer about your earnings, it would be a more comfortable conversation to have, if your customer is well aware of all the services that you can offer. So what we are suggesting is it would be a very good idea to now have a Terms of Engagement in place. Start setting out and explaining to your customers all the things that you do for them and don't be shy. If it runs on to 2 or 3 pages, fantastic. It makes the customer's job in terms of shopping around to compete on services that much less difficult.

Andrew Tjaardstra: Dick, you mentioned before the programme that if full commission disclosure was introduced there is a possibility that brokers may charge insurers fees for some of their services.

Dick Tucker: It is a possibility where brokers have got delegated authority. We can't overlook the reasons why insurers give commission. Insurers use brokers as their distribution arm and want to obtain business. The way to do that is to provide a cost to the broker to actually distribute that business for them. They also want to build their business and, therefore, they want to attract brokers to provide them with that business. So from that perspective it is important that the brokers appreciate and the clients understand that.

Steve White: I am a little concerned about brokers that haven't started. We have heard an argument before that says if they are not asking, why should we have a process? Well you have a complaints process in case you get complaints. If there is a rule in place that says you must have a process in place to deal with that when the occasion comes. So it goes back to what we were talking about, that we are into a time of action now, not into a time of talking. The time has come to get these three things in place, because then we have a much better case to fight than if they are not.

Hear this debate in full, and previous debates, by accessing the archive on the website at www.brokermanagementforum.com

Membership is free. Register online now to secure your place in the event on 'Claims and the broker' on 14 June.

THE PANEL

- Andrew Tjaardstra, Deputy editor, Professional Broking magazine

- Dick Tucker, Compliance manager, Stuart Alexander

- Steve White, Head of compliance and training, BIBA.