FSA Regulation
Impacts of different trading methods and incentives
You must ensure that you operate your business in accordance with the FSA Principles, specifically
- Treating Customers Fairly
- Managing Conflicts of Interest
- Integrity
The level of risk that they give to intermediaries using the trading method or incentive in an appropriate way are discussed below:
- Profit Share
- Overriders or additional payments based on meeting premium targets
- The broker has received loan finance/subsidy from an insurer to acquire another business
- An intermediary is looking to only do business with a small panel of insurers
- An intermediary is looking to consolidate business with one insurer
- Will an on-site underwriter from an insurer compromise the broker?
- What are the considerations where the insurer handles the customer directly after new business?
- What are the implications where third parties (such as insurers) hold equity stakes?
- Issues around direct incentives to front-line staff
- Competitions to intermediaries or their staff
- Non-financial elements insurer deals
- What are the impacts around scheme business?
- Up-Front Payments
- Hospitality
- Net Rates
- Customer Incentives
- Premium Flexibility Funds
Ensuring that the intermediary is not discouraging customers from making claims where this would improve their profit share. It may be appropriate to discourage a claim if the broker feels this would have a significant adverse effect on a customer's future premium, but it may be wise for the intermediary to disclose that this could affect their profit share earnings too.
Ensuring that the intermediary is getting the best price for the customer, i.e. that they are not actively inflating the price to increase profit share payments. This could be achieved by having a set of laid down processes that are shared with customers around how a broker will market and re-market cases.
Ensuring that business is not placed with an insurer solely because the insurer has a target based payment.
If an intermediary knows that they are only going to use one insurer to place that customer's business, then they should state so through their status disclosure.
If they are looking to use one insurer over others, but can still choose other insurers, then they must understand whether the price/service/product mix of the insurer they are going to use is most suitable (from the options they have chosen to have available to them) for the customer's demands and needs.
In agreeing to work with an insurer towards a premium target, they should ensure that the target they have committed to is achievable through the business models and trading styles that they operate.
The potential conflicts of interest will depend on the terms that have been agreed as part of the provision of the loan finance.
If the loan is on commercial lending terms only, then there is no commitment to provide the insurer with business, so no conflict should exist with the intermediary's commitment to act in the interests of their customers.
If the loan requires a level of business support from the intermediary then, as long as this does not materially affect their placing decision at an individual case level, this should not be a conflict of interest
If an intermediary wants to ensure that there are no potential conflicts for certain customers, then they may wish to consider having a 'sole supplier' arrangement for those particular customers.
The intermediary may also wish to consider looking at the commitment in advance and understand whether this is going to be achievable, based on the type of business that they are acquiring and the likely share of business that would gravitate towards certain insurers. For example, if they would ordinarily place 25% with one insurer, agreeing to a commitment that would mean 40% of business being placed with that insurer is likely to present problems to the intermediary. These problems could be reduced or removed if they change their business model (e.g. by adopting sole supplier status for certain segments of their business).
An intermediary may also wish to declare to customers that they have received loan finance/subsidy from the insurer, but that this is not influencing the way that they do business, or (if it is) that this will be declared through their status disclosures.
There is no requirement for an intermediary to look at the suitability of the panel of insurers they want to use, so the intermediary is free to choose which insurers they deal with.
If the intermediary operates a panel that is likely to be the best that the market can offer then they may be able to give the impression that they operate a whole of market service, but they will need to ensure that they review the suitability of their panel on a regular basis. This is common practice in the Life industry.
If the intermediary has not made the panel selection with a view to the customer, but to their own considerations, then it is likely that they will need to disclose, via the Status Disclosure, that they offer products from a limited range of insurers only. The list of who they deal with should be available to customers on request.
If the panel is unable to provide a product that is at least 'suitable' to the customers needs, then they should advise the customer they are unable to meet their needs. However, as stated previously, there is no need for the panel to provide the best product available, as would be required in the Life industry.
The intermediary's main concern is whether the insurer that is receiving the business can offer a suitable product to each customer.
The intermediary should acknowledge to the customer, via the status disclosure that they are only offering one insurer for their particular renewal.
If the intermediary is looking to move business without consulting their customer, then they should look to put in their customer terms of business agreement (TOBA) in advance that they have the right to look for suitable alternatives on behalf of the customer and re-place business.
The intermediary should also decide what their policy is likely to be if the customer is not prepared to be placed with the new insurer for whatever reason. i.e. will they offer an alternative insurer, will they decline to deal with the customer, etc (and ensure they have appropriate status disclosures to handle these scenarios when they emerge).
There are different risks attached to whether the intermediary is intending to move all of their business to one insurer, or whether they are moving the business of one carrier to another, whilst maintaining a wider selection of insurers to use where appropriate.
An on-site underwriter merely provides point of sale servicing and fulfilment for the intermediary
It is important that the on-site underwriter does not engage in activity on behalf of the intermediary, unless this is in their capacity as an employee of an insurer. i.e. if the intermediary wants the on-site underwriter to manage a customer's policy direct with them, then we make it clear that it is NU dealing with the policy, and not the intermediary.
It is important that the intermediary, as always, makes clear to the customer the nature and range of services that they will provide, so, if the intermediary will utilise the on-site underwriter to take all customers of a certain type, this should be made clear to the customer.
For the element that the intermediary controls, they must advise the customer of the nature and scope of the services that they provide, via their status disclosure.
Thereafter, if the insurer handles the business direct with the customer, the insurer is then engaged in regulated activity, and should issue a status disclosure.
As long as the intermediary is not involved in the placing or administration of the insurance contract in any way, then they are not engaged in regulated activity under that contract, regardless of the fact that they can earn commission from the insurer.
The intermediary is responsible only for the elements of the overall service that they have undertaken, and must therefore ensure that this has been carried out in a competent manner.
All equity stakes of 10% or over in a business must be disclosed, through the status disclosure, prior to the conclusion of a contract, as this is the level that the FSA feel will begin to influence the company's placing decisions, and may therefore mean that the advice is not as impartial as the customer would expect.
For equity stakes below that level there are no regulatory issues.
A higher than 10% level of equity stake is likely to create a greater regulatory risk, as the intermediary may feel obliged to place a greater level of business with an insurer. This will require disclosure to each customer through the status disclosure, which could lead to a customer questioning the advice that the intermediary gives.
If the equity stake is over 50% then the third party would effectively control the company.
From time to time insurers offer incentives to front line staff, which may take the form of CDs, DVDs or Gift Vouchers. These incentives tend to be directly linked to the business that is written.
These incentives may compromise the intermediary's duty to treat their customers fairly, depending on the instructions that the intermediary gives to their staff around accepting these incentives, and how they affect the behaviour of intermediary's staff.
If they do not change the way that they conduct business, other than perhaps getting one insurer the business over another when all other things are equal, then there should be no issue.
Intermediaries may feel it is appropriate to establish additional protocols in their business, to ensure that they do not cause regulatory issues.
If an intermediary is making it clear to their customers that they are only dealing with one insurer for any given sale, then the existence of incentives of any description may not give any major regulatory concern.
The issue here is whether the competition causes the intermediary to place business with the insurer when a better option that they would have otherwise used was available.
Potentially, the better the prize, the more risk that a broker or their staff could be encouraged to trade non-compliantly.
Competitions that reward individual performance on sole-insurer arrangements may not cause any major regulatory issues, as long as the sole-supplier status is disclosed to each customer.
The non-financial elements of an insurer deal tend to be less performance linked, i.e. the intermediary does not have to deliver a certain level of business volume or profit to gain access to these elements.
If the elements help the intermediary to better understand where an insurer can differentiate themselves over their competitors, then they may influence the intermediary in placing business, but not in a way that would likely give regulatory concern.
The issues around scheme business will focus on treating customers fairly and managing conflicts of interest in their business.
If the intermediary has delegated underwriting authority, or claims settling authority, this could generate a conflict of interest, where the broker acts for the insurer instead of the customer.
The nature of the delegation will determine the level of potential conflict that the intermediary faces, but if the intermediary discloses their business practice with their customer, this should mitigate many of the potential problems.
If a scheme offers customers a more suitable price or product than is usually available to customers, then the intermediary may not need to disclose that they are using a scheme as prime carrier for certain customers, as they are still taking into account other insurers' offerings.
If the intermediary will not consider any other insurers' offerings under any circumstances, then they should disclose that they are operating under a sole-supplier arrangement with that insurer.
An up-front payment is one that is made to a broker that is not linked to the performance of their account in the future. Ordinarily this would be linked to the belief that the broker is going to create positive value to the insurer, but would not be directly linked to the meeting of pre-agreed targets.
As the payment is not performance-linked, then it is difficult to see how it would affect a broker's requirement to act in their customers' interests when placing their insurances. There could be some element of the broker feeling that they 'owe' the insurer but, as there is no direct linkage, it could be difficult to deem it an incentive.
Where it becomes slightly less clear is where the broker is given the impression that further payments may be made in the future, if they perform well. In many ways, the less definition that is given to a broker around how they can secure an additional payment, the more this may cause the broker to act against their customer, as the basis for securing the payment is not known.
If the payment is related to additional services that the broker carries out on behalf of the insurer (often referred to as Work Transfer Payments) then this is likely to be of a lesser risk than where this there is an increase in the base commissions paid that is not related to the provision of additional services.
Where basic commission is increased to a level that differentiates the insurer relative to other insurers, then the broker may wish to consider appropriate systems and controls around ensuring that the level of commission does not have an undue impact on the brokers choice of insurers to recommend.
Where the payment takes the form of a lump sum that is not linked to performance, the broker may feel an obligation to support the insurer, to justify the payment, and to ensure that future payments are made. Because it is not tied to anything in particular this may encourage the broker to act against their customers' interests in a number of areas.
Hospitality with brokers can take the form of a wide range of activities.
It is appropriate for brokers and insurers to adopt hospitality policies around what would constitute inappropriate activities and ensure that they abide by their own policies.
The level of risk that exists is dependent on the quality of the policy that exists and the levels of hospitality that a broker is prepared to accept.
This is where the broker is given the net price from the insurer, with no commission added.
There may be an element of risk that attaches to brokers if they do not disclose the nature of the service and any fee that they charge to their customers.
Incentives that reward the customer are very unlikely to have a regulatory risk, as the customer is benefiting from the reward.
Some brokers may value such activities in terms of building their proposition to their customers; even though these don't themselves actually improve the broker's profitability.
These funds are offered by insurers to brokers to allow them to discount individual customers' premiums. Typically, each customer will get a different discount ,or none at all, dependent on how the insurer's rules operate on the fund.
Brokers who operate these funds need to consider how they ensure that each of the customers that they deal with are treated fairly. It is important that brokers ensure that they have internal policies that govern how they operate these funds, particularly in the light of their obligation to act primarily as the agent of the customer.
