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Broker conflicts: thematic review– what can we expect?

22 May 2014.

The FCA will on 27 May 2014 be publishing its findings from its thematic review of broker conflicts of interest and remuneration in the UK SME general insurance sector.  We will report on the review as soon as possible after publication.

In the meantime, what can we expect? As discussed at our recent Corporate Insurance half day seminar, it is worthwhile comparing and contrasting the regulator's approach to conflicts of interest and inducements in the retail investment sector as there are parallels with the activities of brokers and insurers in the general insurance market. In January 2014, the FCA published its Finalised Guidance in relation to retail investment inducements and conflicts of interest. The guidance is aimed specifically at retail investment firms and product providers and includes substantial detail on the application of specific COBS rules and guidance on conflicts of interest and inducements, which don't directly apply to general insurance brokers and providers (contrast the detailed inducements rules in COBS with the guidance in ICOBS, which does little more than restate Principle 8 on conflicts of interests).  However, there are clear parallels between the relationship between providers and distributors of investment products to which the retail investment Guidance relates and the relationship between providers and distributors in the general insurance market.

Of particular relevance to general insurers and brokers is the FCA's guidance on panel selection; exclusive distribution arrangements; multi-year and variable service and distribution arrangements; and their reiteration of good practice on entertainment and training, which reinforces guidance given after the asset management sector conflicts of interest review findings (which were published in November 2012).

Panel selection and exclusive distribution

In its retail investment Guidance, the FCA states that the selection of product providers for a firm's panel should not be influenced by the providers' willingness and ability to purchase significant services from or to provide other benefits to the firm. This is in contrast to the FCA's current guidance on panel selection in ICOBS 4.1.8G, which appears to permit benefits offered to the firm to be a factor in the selection of panel providers, so long as it is not the sole factor. If, as appears to be the case, the FCA now views such firm
benefits as giving rise to unmanageable conflicts of interest, then it is difficult to see how the ICOBS guidance on panel selection can continue in its current form.

Similarly, where a firm distributes a product exclusively for a single provider, in the FCA's view, the selection of that provider being influenced by sizeable payments or other benefits offered by the provider to the firm could also lead to a breach of Principle 8.

Multi-year and variable services and distribution arrangements

In relation to services and distribution agreements between product providers and intermediaries, the FCA identified "poor practices" that could create conflicts that it thinks firms would not be able to manage fairly. These included:

  • longer term multi-year agreements where the revenue stream is significant for the advisory firm, which relies on the on-going revenue generated from such agreements to sustain its business;
  • clauses in services and distribution agreements that allow the provider to negotiate a reduced level of payments for a reduced level of services if the provider loses its place on the advisory firm's panel, or where there is a material reduction in sales of the provider's products.

Training and hospitality

The provision of training by product providers to advisory firms is unlikely to conflict with the best interests of the adviser's clients where the training relates to features and benefits of the provider's products or services, or subject areas in relation to the adviser's professional development, and the following conditions are met:

  • such training is made reasonably available to all firms that could recommend the provider's products or services (e.g. on a first come first served basis);
  • it is provided in the UK, where it is provided to UK based advisers; and
  • any hospitality given in connection with the training complies with the FCA's guidance on hospitality and gifts.

In relation to hospitality and gifts, the retail investment Guidance reiterates that these must be of a "reasonable value" and sets out examples of characteristics of hospitality and gifts that, in the FCA's view, meet this requirement, including:

  • the event at which the hospitality is provided is in the UK;
  • adviser attendance at the event, and any gifts or prizes given or awarded, is not based on criteria incentivising poor behaviours e.g. it is not based on the volume of business generated by the adviser for the provider's product;
  • the event at which the hospitality is provided is designed for business purposes e.g. product training; and
  • any overnight accommodation provided to advisers is only paid for by the provider where necessary e.g. where the event is run over two days.

There is much more of interest in the retail investment Guidance, including in relation to the provision by product providers to advisory firms of IT development and maintenance, contributions to seminars and conferences and promotional activity. It remains to be seen to what extent the FCA will apply the same standards to general insurance product providers and advisors. In any event, brokers should already be reviewing their panel arrangements and distribution and services agreements with insurers for potential and actual conflicts and the steps they should be taking to prevent them giving rise to customer detriment.