Insurance brokers in the UK are facing a steep and challenging learning curve, after the UK regulator identified multiple problems in the handling of conflicts of interest by brokers servicing the SME market. Some of the problems are pretty fundamental, raising concerns that the brokers involved either don’t understand what is undoubtedly their main ethical risk, or even worse, hold it in low regard. Both possibilities should worry the Financial Conduct Authority (FCA). Can insurance brokers ‘change their spots’ sufficiently, and quickly enough, to head off a regulatory backlash?
Some commentators have found solace in there being no one, big ‘smoking gun’ problem that permeated all of the seven brokers. However such solace is in reality somewhat paper thin: one big issue is less of a problem (because it just needs one big fix from all of them to sort it out), than the range and depth of the issues found, which point to a more complex and varied set of fixes.
Here are some of the issues that the FCA identified in its thematic review of how insurance brokers were handling conflicts of interest:
1. acting as both agent of the client and agent of the insurer in the same transaction, without any clear internal demarcation between the two roles;
2. relying on nothing other than a policy statement for their management of conflicts of interest, without any supporting procedures, controls or management information;
3. inadequate disclosure to clients of the basis upon which the broker was acting, with one using a single terms of business agreement that covered a host of scenarios;
4. Inadequate management and control frameworks, so no one could be sure if conflicts of interest were being managed properly or at all;
5. over reliance on just disclosure as the means by which the broker meant to mitigate the conflict of interest risk.
Those are symptoms. So what were the causes? Two stand out. Firstly, one that I’ve highlighted on numerous occasions: brokers’ business models have evolved in breadth and complexity at a much faster rate than their capacity to manage ethical issues like conflicts of interest. Secondly, the people in charge have failed to set the right ethical ‘tone from the top’. The dominant message seems to have been less ‘customer, customer, customer’ and more ‘commission, commission, commission’.
The danger for customers, investors and non-executive directors is that the FCA review could be followed by a lot of tinkering and the sticking on of boiler plate processes. This approach will change little other than appearances, for the problem is largely one of ethical culture. That’s not something that can be changed overnight, but it does pay greater dividends over time.
If, as I expect, the FCA levies some sharp fines on a broker or two over the next twelve months for conflict of interest failings, that should signal to the market that the culture surrounding how conflicts of interest are managed has to change. Such signals are vital for triggering cultural shifts: they show that change is inevitable, even if uncomfortable.
Such cultural shifts don’t emerge from revised best practice guidance: each firm’s culture is too personal for that. Each broker needs to take a long, hard look at ‘why we do what we do’ and work out how to drop old habits and learn some new ones. The CII’s paper ‘Ethical Culture: a Guide for Small Firms’ is a good place to start learning about how this can be done (although some may say I’m bound to recommend it, as I wrote it).
What if insurance brokers tried to bluff their way out of their present predicament and pay little more than lip service to the changes expected by the FCA? They need look no further than financial advisers in the retail investment market, who have experienced a wholesale regulatory restructuring in the last few years. Financial advisers have said goodbye to commission 18 months ago and said hello to fees, professional assessments and clearer agency status, after considerable upheaval and for some, pain. Lip service would be a high risk strategy if your regulator has an alternative, ‘oven ready’, pre-tested’ model ready and waiting from a parallel market.
There’s a clear but unwritten message in the FCA’s report that compliance people within these insurance broking firms have either been undervalued, not listened to or ill equipped (or more likely, some mix of the three). Their status needs to be strengthened, along with their capabilities: working with a ‘what do we have to do’ mindset is a limited value in the situation that these insurance brokers now find themselves. To reassess the importance of the insurance broking profession and deliver their key obligation to represent the best interests of their clients, the goal should be to achieve a ‘what should we being doing’ mindset.
Duncan is the founder of the Ethics and Insurance blog and the author of its many posts. He's a Chartered Insurance Practitioner, having worked 18 years in the UK market. As an adviser to many firms on ethics issues, as well as a regular conference speaker, he is one of the leading voices on ethics and insurance.