UK: The FSA considers commission disclosure

Should commission disclosure be mandatory? This question has been asked many times in the UK in the recent past, without receiving a clear answer. The Financial Services Authority (FSA) recently published Discussion Paper 08/2, entitled “Transparency, disclosure and conflicts of interest in the commercial insurance market”. It invited views on transparency and disclosure and on possible options for addressing the issues it identified.

At present, commission disclosure to commercial customers is mandatory in the UK – but only at the customer’s request. In 2007, the FSA commissioned CRA International (CRA) to examine whether commission transparency within the commercial general insurance market leads to market failure and whether mandatory commission disclosure would generate benefits greater than the costs of intervention. CRA’s report was published in December 2007. Although it identified evidence of market failure in a “middle segment” of the commercial insurance market, it concluded that the costs of mandatory commission disclosure would outweigh the benefits. 

FSA Discussion Paper

The FSA published its Discussion Paper in March, requesting comments by 25 June 2008. The Paper’s starting point was that “full transparency of information is necessary to enable customers to operate more effectively”. The FSA expressed concern that commercial customers are poorly informed about the full cost of mediation services, the extent to which their intermediary searches the market and the capacity in which their intermediary is acting. It identified six detailed outcomes on which it is focusing and identified three broad options for addressing its concerns:

  1. More rigorous supervision and enforcement of existing rules and principles.
  2. Enhanced “on-request” regime.
  3. Mandatory commission disclosure.
The Paper included a set of draft rules “for illustrative purposes only” that would mandate commission disclosure. These rules would apply to insurers and intermediaries and would require them to ensure that, before a contract is effected, the total remuneration received by all intermediaries is disclosed to commercial customers.

Responding to the FSA

In the Lloyd’s market, the leading role in responding to the FSA has been taken by the LMA, in consultation with its members and with Lloyd’s. Its response made the following points:

  • It is in favour of full disclosure to all commercial policyholders of intermediaries’ remuneration, scope of service and status. 
  • It reluctantly accepts that an industry-led solution might be preferable to an FSA mandatory regime. 
  • Insurers should not be made responsible for the disclosure of intermediary remuneration. 
  • There is a need for a “level playing field”/proportionality.

 

A copy of the LMA’s response is available on the LMA’s website: www.lmalloyds.com  

Next steps

The FSA is now considering all the responses it received to the Paper. If it decides to press ahead with mandatory disclosure, the proposals will be subject to a separate consultation and cost-benefit analysis. In the Paper, the FSA said that it was keen to encourage a market-led solution, and discussions have taken place in the market about the form that industry guidance might take.

As is clear from the LMA response, insurers are committed to transparency, but do not believe that it is practical for responsibility for commission disclosure to rest with themselves. There is consequently a good deal of interest in a solution that would address the FSA’s concerns but would stop short of a mandated requirement on insurers to do something difficult or impossible.

UK insurers and intermediaries therefore await the FSA’s next moves on this issue with interest.
Last updated on 27 Aug 2008