UK brokers in regulators’ sights over MGA conflicts
The Financial Conduct Authority (FCA) did not find the smoking gun it was looking for in its critical review into conflicts of interest among larger brokers that provide cover for small and medium-sized enterprises (SMEs), according to RPC partner Charley Taggart.
But the regulator did say that conflicts were "inherent" within the seven insurance intermediaries it surveyed, adding that they were not being managed properly.
Taggart said: "The FCA wants brokers to have different staff managing the relationships with the insurer where there is a coverholder arrangement to the staff managing the customer, so there is an effective Chinese wall in place."
"Brokers that can't do that must regularly audit their decision-making process in recommending a product, so there is a paper trail in place to demonstrate that they are effectively managing conflicts."
The FCA said it would use the full range of regulatory tools and put in place supervisory engagement measures to combat the problem.
The notification will alarm intermediaries that are channelling more of their SME business into managing general agency (MGA) structures, which typically enable them to earn a higher proportion of the underwriting revenue.
However, it is not always clear whether these less sophisticated buyers understand that the MGA may not necessarily be the best market for their requirements and that its duty is primarily to its insurance markets rather than the buyer.
Small businesses need to be able to trust their insurance intermediary to act in their best interests, said Clive Adams, director of supervision at the FCA.
"If there are conflicts of interest that are not identified or properly managed, that trust is put at risk."
The news will also ring alarm bells for brokers responsible for MGAs, which have long feared a regulatory crackdown on the current commission model.
In particular, news of the report may concern consolidator intermediaries such as AJ Gallagher and Towergate that place significant premium volume through their own MGA platforms.
"Some intermediaries have worked to expand their role in the distribution chain, taking on functions that are traditionally associated with the insurer in exchange for additional remuneration," the report said.
It claimed that the increased commissions generated for brokers acting as an agent of the customer and operating an MGA could create a conflict of interest.
The regulator said brokers continued to claim independence and that they are acting in the interest of the customer, despite earning commissions as an agent of the insurer.
"This increases the risk of customers misunderstanding the role they are performing in arranging their insurance," the report said.
"The risk of conflicts of interest arising in these business models were exacerbated where there was not clear segregation of roles, revenues and information between these operations."
It said commoditisation in the market had led to brokers placing business through binding authorities or MGAs without undertaking any broking activity for that individual risk.
"Many individual SME customers' insurance risks are placed with a market without other placement options having been considered," it explained.
The regulator said it was concerned that decisions were being made in the interest of brokers rather than their clients.
"This could result in some small businesses overpaying or buying products they don't need," the report suggested.
"Whilst the FCA's review focused on larger firms, all intermediaries should take note of the findings and ensure any conflicts are appropriately managed."
The FCA said it would be working closely with the industry to communicate the results of the review. It added that it planned to work with the firms involved, using "appropriate regulatory tools" to address certain issues.
The notification comes only days after Mark Carney, the governor of the Bank of England, warned insurance CEOs that they would be punished in the same way as banking executives if they failed to fulfil their duties properly.
"The FCA has flagged up the add-on and premium finance markets as areas of particular concern, so brokers would be wise to review their conflicts management practices in these areas as a priority," advised Taggart.