Have insurance brokers done enough to improve their handling of conflicts of interest? Three years ago, the UK regulator identified multiple problems. That’s long enough for fixes to be put in place and mindsets to be changed. So how have things changed?
Clearly, not all brokers are the same. Some will have been on top of this from the start, while others will have hoped it would just go away. Those with oversight responsibilities need to weigh up where their firm is on this spectrum and whether it still needs to improve.
Some of the problems identified by the regulator were pretty fundamental, raising concerns that the brokers involved either didn’t understand what was undoubtedly their main ethical risk, or even worse, held it in low regard.
Finding out how that mindset currently sits should be task 1. Is it still a ‘do what we want to do’ mindset, or is it a ‘do what we have to do’ mindset, or a ‘do what we should be doing’ mindset?
Let’s remind ourselves of five key issues raised in the FCA’s report. They found brokers that…
These were pretty significant when raised three years ago. Could they even more significant now? After all, the business models of many brokers have broadened and become more complex in the meantime. The board of each broking firm should be able to gauge that one.
It may be tempting to turn to the last report presented to the board about conflicts of interest. I hope there’s been some – if not, your molehill has just become mountainous. Such reports will probably have detailed a range of adjustments, and these can help, but are unlikely in themselves to deliver any significant change.
That significant change (and it’s clear the FCA believed some brokers were in need of it) needs to come from one place, and aim in one direction. It needs to come from the top and be aimed at the firm’s ethical culture. Has there been evidence of this? If so, what have you seen that would point to it having been strong and effective enough?
Let’s look at this another way. Has the FCA seen evidence of a culture shift in the broking sector around this key ethical risk? That is something I can’t confidently answer, but if you were to push me, then I would say that I have my doubts.
In which case, what might then be in the pipeline? An increased likelihood of commission disclosure? Regulators like transparency as a soft reforming tactic – think of renewal premium disclosure.
Or might they have a nuclear option on the table: a wholesale regulatory restructuring along the lines of financial advisers? They said goodbye to commission 5 years ago and said hello to fees, professional assessments and clearer agency status. It caused considerable upheaval and for some, pain.
Paying only passing attention to conflicts of interest would be a particularly high risk strategy if your regulator has an alternative, ‘oven ready, pre-tested’ model ready and waiting from a parallel market. If over the next year or two, the FCA’s study of the wholesale insurance market finds similar issues there, some form of drastic action will move a step or two nearer.
There still exists then a window of opportunity for boards of broking firms to make sure that their executives have done enough (if not more) to satisfy the regulator on their handling of conflicts of interest.
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.