global insurance management

Conflicts of Interest

Jul 15 2013

Conflicts of Interest

Relevance:                   All firms.

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

The FCA has recently announced that they will be conducting a review of how firms deal with any conflicts of interest that arise in the course of their business.  Whilst they have not yet given any details of how, what or where, this is an issue that has been on the regulator’s radar for some time; even going back to when the FSA took on General Insurance in 2005.

A number of the FCA’s Principles for Business cover this area:

  • Principle 1-  A firm must conduct its business with integrity;
  • Principle 6-  A firm must pay due regard to the interests of its customers and treat them fairly;
    • Principle 8-  A firm must manage conflicts of interest, both between itself and its customers and between a customer and another client.

This is yet another example of the new regulator looking after the interests of the consumer and intends to be more intrusive.  It is being referred to as “forward-looking regulation, not box-ticking”.

It is therefore essential that all firms have a written policy that will allow senior management to identify, investigate, manage, control and mitigate any issues that could lead to conflicts of interest that arise or may arise within their firm.

FCA Speech

The announcement came in a speech given by Simon Green, Head of General Insurance and Protection at the FCA.  The following is a relevant extract:

Another area I am keen to explore is conflicts of interest. I am particularly interested in how insurance brokers identify and manage potential conflicts where they receive revenue from both their customers and insurers. 

To be absolutely clear, when I talk about revenue received from insurers I do not mean the payment of broking commission in a normal range. I am talking about profit share, volume arrangements and other payments received from insurance companies.  We need to establish whether the flow of this type of revenue from insurers to brokers acting as agent of a customer might:

  • unduly influence a broker to recommend an insurer against the customer’s best interest, and/or
  • cause a broker to improperly perform its duties to its customer.

That’s why today we are launching a strategic thematic review into how UK insurance brokers manage of conflicts of interest.

A full transcript of Simon Green’s speech can be found at:

What is a “conflict of interest”?

Basically, a ‘conflict of interest’ is a situation that arises where the firm, or an employee or other associate of the firm has competing professional or personal interests that may prevent services being provided to clients in an independent or impartial manner.

The FCA gives a bit of assistance on its webpage, as follows:

The following are examples of conflicts of interest:

  • an insurance intermediary passing large amounts of business to a particular insurer because they previously worked at the insurer and still had friends there;
  • a mortgage intermediary passes large amounts of business to a lender because they have a relative working at that lender; or
  • a product provider may offer a loan and cash gift in the expectation of getting more business in return. These are inducements or bribes.

But it does not stop there.  Remuneration, gifts and entertainments (both given and received), outsourcing arrangements, other business interests or Directorships and Product Provider training are examples of the areas firms should monitor regularly.

Who is responsible?

The responsibility for the management of Conflicts of Interest rests with the firm’s Senior Management who must ensure that they:

  • are kept fully aware of the FCA requirements in respect of Conflicts of Interest and receive adequate Management Information to enable them to identify and manage any Conflicts of Interest or potential Conflicts of Interest.
  • are able to assess objectively any conflicts or potential conflicts and are aware of the steps that need to be taken to mitigate any such conflicts in respect of both their business and personal responsibilities.
  • 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.
  • receive sufficient Management Information to enable them to carry out an informed assessment of the firm’s arrangements in order to assess that they are operating effectively.
  • have a formal Conflicts of Interest policy in place setting out clearly how the firm proposes to manage any real or potential conflicts, which is regularly reviewed.
  • have clear guidance in place for staff on how to recognise a potential issue and when to escalate it to management.

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