Inherent conflicts within insurance intermediaries are not being properly managed, a review by the Financial Conduct Authority (FCA) has found. After looking at seven of the largest intermediaries who serve small business clients, the FCA has concluded that in some firms, control frameworks and management information have not developed at the same pace as business models.
Research into the understanding of small business customers also demonstrated that few understood that there was a possibility for their insurance intermediary to be conflicted.
Clive Adamson, director of supervision at the FCA, said:
"Small businesses are experts in their particular field but are often not experienced in buying insurance. That is why they need to be able to trust their insurance intermediary to act in their best interests. If there are conflicts of interest that are not identified or properly managed, that trust is put at risk."
Insurance intermediaries can play a number of roles in the distribution chain, sometimes acting as agent for the insurer as well as the customer. These different obligations and the way intermediaries are remunerated create the potential for conflicts of interest that need to be actively managed.
The FCA focused its review on small business customers as they have more complex insurance needs than retail clients but are not always more sophisticated buyers of insurance. As a result, small businesses often rely on insurance intermediaries for advice. The FCA wanted to establish how the flow of revenue from insurers or other sources to intermediaries could affect how customers were treated. It found that:
- there was increased risk of conflicting interests where firms fulfilled multiple roles in the distribution chain and acted as agent for both the customer and insurer in the same transaction;
- the control framework and management information in some firms had not developed in line with changes in the size and complexity of the business;
- some intermediaries relied on disclosure as the main way to address conflicts of interest rather than having effective control frameworks in place;
- disclosure provided to customers was sometimes very generic and unlikely to meet their information needs or enhance their understanding; and
- conflicts of interest were not always effectively mitigated in relation to add-on insurance or services, premium finance or where the cost of insurance is borne by a third party.
Consumer research also revealed that small businesses are not aware of the differing roles intermediaries can perform. Many (68%) believed that intermediaries acted as their agent when selecting and placing their insurance. Further, a large majority (86%) of small business policyholders expected their insurance intermediary to search for more than one quote, which was not consistent with placement processes within some intermediary firms.
The FCA is concerned that if conflicts are not properly managed there is the risk that decisions are made in the interest of firms rather than their small business customers. This could result in some small businesses over-paying or buying products they don’t need.
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 regulator will be working closely with the industry to communicate the results of the review and, with the firms involved, will use appropriate regulatory tools to address specific issues.
Notes for editors
- The thematic review into Commercial insurance intermediaries - Conflicts of interest and intermediary remuneration[1].
- On 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.