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'Systemic abuse' absent in Aussie broker review

Australian regulator the Australian Securities and Investments Commission (ASIC) announced last Thursday (30 June) that it had uncovered no evidence of systemic abuses of broker remuneration practices of the kind exposed by the Spitzer probe in the US.

However, the review – conducted in the aftermath of New York attorney general Eliot Spitzer’s probe into industry practices – found shortcomings relating to brokers’ management of conflicts of interest and remuneration disclosure.

It also noted the increased use of contingent commission arrangements, and highlighted the “inherent conflict in the practice of paying volume bonuses or other types of contingent remuneration to brokers”.

ASIC executive director Jennifer O’Donnell commented: “ASIC found that more than half the brokers reviewed had contingent remuneration arrangements in place and most of those brokers placed a significant proportion of their business with insurers that paid extra commissions based on the volume of business placed with them.”

Under Australian law, brokers must disclose remuneration incentives received from insurers to their clients.

“Where contingent and preferential remuneration arrangements are significant to broker revenue or profit, merely disclosing the conflict and imposing internal controls may not be enough. In such cases, the only way to adequately manage the conflict may be to avoid it,” said the regulator in a statement.

“The review noted that contingent commission arrangements have increased, so the management of conflicts of interest and disclosure of remuneration by insurance brokers will continue to be the subject of regulatory scrutiny,” O’Connell added.

In future reviews, ASIC said it expects to see “robust” conflict management arrangements with “timely, specific, prominent and meaningful” disclosure.

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