The FCA announced enforcement action against a
commercial broker and a fine of £4 million in late 2017 as a result of failures
associated with the broker’s management of conflicts of interest. The details
of the case are here.
Conflicts of interest can be anywhere, and firms
are well aware of that. However, there is a qualitative difference between the
conflict of interest that an individual might have with, say, a supplier, and
what the FCA identifies as an ‘inherent conflict of interest’ in the business
model or ownership structure. This is the risk that commercial intermediaries must
manage.[1] It is not static, and it
changes as intermediaries take up other activities where they act as an agent
of the insurer.
The FCA has also undertaken a thematic review of
commercial insurance intermediaries focusing on this issue. (It published the
results in 2014 here.) The FCA evidence
included a survey of small and medium enterprises (SMEs).[2] This suggests that many
SME customers do not fully understand the intermediary’s role and how it may have
changed in recent years. For example, four of five SME customers expect an
intermediary to get quotes from two insurers, which is not consistent with how
intermediaries operate, in particular for micro SME customers (fewer than nine
employees).
There are wider messages from this enforcement
action for the practical management of inherent conflicts of interest. To begin
with, there should be a regular process to identify conflicts of interest. This might be challenging but following the
sources of revenue would enable a robust identification of conflicts and of the
impact of changes in the business model.
While a policy on conflict of interest is a regulatory
requirement, it needs to be comprehensive enough to enable staff in the
business to actually manage conflicts of interest. This would require specific
guidance articulating how to deal with customers, including what information to
collect, what checks to undertake, and the production of meaningful management
information.
Business arrangements such as ‘preferred
facilities’ are not ruled out but must be managed and monitored carefully,
taking into account links to brokers’ remuneration, how the firm presents
itself to SMEs, the existence of ‘Chinese walls’ and customers’ (probably
limited) understanding of the intermediary’s role.
Any quality reviews by the first line should be
designed with a view to oversee how inherent conflicts of interest have been identified,
managed and mitigated. The process should be risk based, i.e. always applying
the same degree of checks to all brokers is unlikely to be appropriate.
Last but not least, as ever, culture is a factor.
If statements from senior management do not recognise and support the need to
manage inherent conflicts of interests, don’t expect much of the above to be in
place.
The FCA will usually say something about how the case was discovered, by either supervisory activity or internal review. I was puzzled that the FCA was rather vague on this occasion. On reflection, I suspect (but cannot be certain) that there may be a dependency with the FCA’s thematic review on conflicts of interest mentioned earlier. If that’s the case, it is useful for firms to understand the potential consequences of being unprepared for a thematic review when invited to participate.
