Conflicts of interest – You Are Not Alone
17th December 2014
Any conflict of interest is “bad bad bad” (this pithy definition is from an esteemed colleague).
Solicitors failing to check whether or not they are acting for both claimant and defendant is a classic and now brokers are under examination from regulators.
The Financial Conduct Authority (FCA) has announced that they are taking a dim view of brokers who are placing business, not with syndicates or insurance companies, but with Managing General Agency MGA (binders) they run. Brokers do this to improve their earnings in “soft” markets, i.e. premiums are low.
The conflict of interest is receiving a fee for managing the facility, brokerage for placing the business with the binder and sometimes profit commission. All this without having to leave the office.
Who benefits from these arrangements? Yes the insured has a policy. Yes the insurance company receives a premium. However the “conflicted” broker earns brokerage and also a binder management fee, and may not be clearly explaining what they have done or why to the insured, who may be expecting their broker to act independently, as their agent.
The ATE market is not exempt from these issues. The question is whether or not the client receives best advice and the best policy. As brokers, we look at the market and obtain as many quotes as we can, only then do we recommend what, in our view, is the most appropriate for that particular client. We have always clearly stated in our paperwork the basis of our terms, be they open or restricted markets, in FCA speak this is Treating Customers Fairly.
This conflict of interest issue has in fact come full circle over the last 30 years when the Neill report (1986)) said exactly the same thing: brokers owning insurance companies/placing business with a binder is a conflict of interest. As with our recent blog on mesothelioma, do we never learn?
The FCA is issuing guidance, although they are not being prescriptive (yet) as to what will be done. So watch this space.