global insurance management

Conflicts of Interest - July


Jul 02 2014

Conflicts of Interest

Relevance:                   All firms.

Action required:           Review your procedure for identifying and managing Conflicts of Interest.

In July last year, we alerted firms to an announcement from the FCA that they were embarking on a review of how firms deal with Conflicts of Interest.  The review has now been completed and the outcome has been issued in the form of a Thematic Review paper (TR14/9 – Commercial insurance intermediaries; Conflicts of interest and intermediary remuneration).

A precis of the document appears below and the FCA paper contains all the information.

But just to whet your appetite for further reading on this subject, here are a few items that are of specific concern to the FCA and some additional “food for thought”:

the absence of Chinese Walls around some enhanced commission arrangements;

  • do staff know which insurers pay you enhanced commission?  Generally ''No'' but do Directors that influence placement have this information?

the failure to ensure appropriate organisational controls were in place surrounding the appropriateness and frequency of tender processes;

  • Is there a standard requote expectation for commercial clients, for example, every three years as a minimum, for cases not already placed in a specialist market?

the failure to identify significant commission differentials arising from certain insurer deals and to monitor their effect on placement activities;

  • are you placing with insurers because of enhanced commission or are you getting enhanced commission because you are placing a lot of business? Does client placement reflect insurer performance, more than commission levels?

the lack of effective organisational arrangements around premium finance rates charged to customers;

  • is there a standard approach taken to identify, and offer, the most cost effective solution - insurer or third party finance? 

The firms who were not able to provide sufficient evidence that they were meeting their obligations in all areas had not made the mitigating disclosures required;

  • because potential conflicts were not identified, clients were not advised of the potential issues.

Remember, the FCA’s view is that “failure to manage and mitigate conflicts of interest properly potentially increases the likelihood that individual broking and placement decisions are made in the interests of the firm rather than their customers.”

To prevent this suspicion becoming reality, firms should work out what conflicts of interest might crop up in their business and record the actions to take/taken to address these issues.

The precis of the Thematic Review paper is as follows:

The FCA’s report indicates that:

“We set out to establish how general insurance intermediaries identify and manage potential conflicts of interest where they receive revenue from both their customers and insurers.  We wanted to understand whether the flow of revenue from insurers or other sources to intermediaries arranging insurance for UK SME customers (small and medium-sized enterprises), particularly when acting as their agent, might:

  • unduly influence the intermediary to recommend an insurer against the customer’s best interest
  • cause an intermediary to improperly perform its duties to its customer.”

They also repeat the now-familiar mantra of “we expect customers to be at the heart of how firms run their businesses”.

The review involved “seven large intermediaries/intermediary groups providing services to UK SME customers.”  The FCA indicates that they also surveyed a sample of 1,000 UK SME business owners and were seeking information on:

  • the roles played by insurance intermediaries;
  • who the intermediaries were acting for;
  • the scope and nature of market research that the intermediaries perform;
  • the remuneration intermediaries receive; and
  • the disclosure provided to customers.

And the outcome?  It should not surprise anyone that the FCA found that “conflicts of interest are inherent in many general insurance intermediary business models.” 

It found that:

  • there was increased risk of conflicting interests where firms fulfilled multiple roles in the distribution chain and acted as agent for both the customer and insurer in the same transaction;
  • some intermediaries relied on disclosure as the main way to address conflicts of interest rather than having effective control frameworks in place;
  • disclosure provided to customers was sometimes very generic and unlikely to meet their information needs or enhance their understanding; and
  • conflicts of interest were not always effectively mitigated in relation to add-on insurance or services, premium finance or where the cost of insurance is borne by a third party.

For instance, the report gave the following examples:

  • small businesses were not aware of the differing roles intermediaries can perform;
  • many (68%) believed that intermediaries acted as their agent when selecting and placing their insurance;
  • a large majority (86%) of small business policyholders expected their insurance intermediary to search for more than one quote.

Another aspect showed that intermediaries in the sample were unable to provide accurate summary information about how their SME customers’ insurance policies had been sourced and placed; be it by open market broking, by using a panel of insurers, placed to a preferred facility or binding authority after consideration of other options or placed to a single insurer without consideration of other markets.

Although the review was undertaken with large firms, the FCA are particularly concerned that firms of all sizes take note of their findings and assess whether they need to make any changes to their business operation to ensure all conflicts of interest are identified and managed accordingly

The areas that smaller firms should be looking closely at relate to the capacity in which they act, either for the insured, the insurer or a combination of both, the background research activity undertaken and the extent of information and remuneration that is disclosed to the client.

Firms will understand that as far as the FCA is concerned, the firm’s Senior Management is responsible for the management of Conflicts of Interest.

Therefore, the firm’s Senior Management must ensure that they:

  • have a formal Conflicts of Interest policy in place setting out clearly how the firm proposes to manage any real or potential conflicts and have a process to review the policy regularly;
  • have clear guidance and training in place for staff on how to recognise a potential issue and what they should do to alert Senior Management;.
  • maintain their own awareness of the FCA requirements in respect of Conflicts of Interest;
  • are certain that their clients understand and appreciate the capacity in which they are acting in relation to every transaction;
  • assess any real or potential conflicts and mitigate any such conflicts in respect of both their business and personal responsibilities;
  • are confident that the firm’s systems and controls are robust and sufficient to determine that the firm is taking all reasonable steps to identify and manage any conflicts of interest that may arise;
  • obtain sufficient, relevant and appropriate Management Information (MI).

This area is something that has been subject to previous reviews and guidance, from both the former regulator, FSA, and trade bodies; indeed, BIBA produced industry guidance in 2009, confirmed for 3 years and reconfirmed in 2012.  The FCA has suggested that firms have been a bit narrow in their use of the guidance and have reiterated that “ICOBS rules address the narrower issue of disclosure and as such the broader systems and controls requirements (of SYSC and PRIN) also need to be taken into account and complied with.

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