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It seems commissions are here to stay – why should this be?

Twenty years ago, the writing was on the wall for commission-based remuneration.

Fees were where it was at, and the idea that a broker’s pay should bear a relationship to the size of the premium needed to get the cover placed was starting to seem a little old-fashioned.

Top brokers used to speak of a desire to join the ranks of other more respected (and better-paid) professionals. They argued that lawyers, consultants and accountants didn’t extract semi-opaque percentages from the gross cost of doing business but were confident enough in their own abilities to bill what they knew they were worth.

The added value was completely transparent.

After a sharp intake of breath when they saw the billable hourly rates, clients generally paid up, knowing that the cost of poor professional advice was many multiples of the numbers on the invoice.

In other financial services markets such as investments and pensions, regulators were moving to outlaw commissions or unbundle services and make sure they were billed for separately.

After Spitzer, there was a particular moment when it seemed highly plausible that all percentage commissions would be banned overnight. Fees were growing as a proportion of broker remuneration; it seemed inevitable they would one day reach 100 percent and the advent of the pure net premium market would be upon us.

Yet two decades later and commissions have more than held their own. Figures from the FCA review of distribution in the wholesale insurance markets show that, in the five calendar years from 2012 to 2016, commission-based remuneration grew 3 percentage points to 54 percent of broker remuneration, peaking at 55 percent in 2015.

And this was against a backdrop of sharply falling prices.

Meanwhile, fees waned dramatically – falling from 39 percent to only 28 percent of remuneration.

It seems commissions are here to stay – why should this be?

The answer is simple. Spitzer didn’t ban commissions but instead gave us a robust culture of transparency and disclosure.

Once they know what is being paid, how and by whom, clients have everything they need.

Clients can perfectly well add up a percentage and a fee and compare the two.

They also know exactly what work is being done on their behalf, and how much is pure transactional price negotiation, how much claims advocacy, how much compliance, how much global distribution and how much benchmarking and risk consultancy.

If they are not happy with pricing or service levels they can switch to at least two other global brokers and a host of independents, all of whom are dying to win their business.

The regulator could ban commissions tomorrow if it wanted to.

It would mean a shock and a readjustment, but it wouldn’t change the fundamental need for brokers and the work they do.

The cost and market value of that work wouldn’t be altered in the slightest and it would still have to be paid for.

The reversal of the past 20 years proves that transparency is the only thing that really matters.

Leave clients to decide how they want to pay – it’s their money after all and the best brokers will always give them exactly what they ask for.

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