Binders could be next in FCA commissions crackdown - compliance experts

Specialists at regulatory compliance firm ICSR have carefully scrutinised the FCA’s consultation paper on leaseholder reforms.

The FCA found widespread market failure by insurance firms, and now the watchdog is likely to look deeper into brokers’ commission arrangements, believes compliance director Natalie Dick of ICSR. 

In particular, the FCA will be interested in distributors who receive increases in commission when premiums rise, despite not doing any more work.

Significant concern

In a regulatory update following the FCA leaseholder consultation, ICSR consultant Palak Bedi wrote: “The most significant concern for brokers and MGAs will be the comments aimed directly at the practice by which brokers commission increases in line with premium increases because the commission percentage remains the same. 

“This practice is embedded in the remuneration arrangements across the market. The FCA is effectively asking the question why that is the case. 

“In their view, an increase in the premium by the insurer does not mean that that the workload of that broker has increased, so why should the absolute level of their income?”

Bedi said: “This implies that if the workload has not increased then the value has decreased. It means that where premiums increase and the rate of commission stays the same the intermediary would be required to effectively reassess whether the ultimate policyholder is receiving value.”

Value assessments 

Dick added: “This is a very significant paradigm shift.

“It is not moving the goal posts but more akin to moving the entire playing field to a different continent – and possibly leaving the goal posts behind so that the game must also change.  

“If this remains the FCA view, we can see some trouble ahead.

“For the moment, the issue is limited to the particular circumstances which relate to property insurance but the possibility that it might be applied more widely should cause concern for the insurance market as a whole.

“As a minimum, firms needing to consider value and undertake value assessments need to take the issue into account and identify how they may respond if asked the question of why value remains when commissions have automatically increased in line with the premiums but no further work was required for that increased commission.”

Big brokers blamed

Big brokers making ‘silly money’ have been blamed for the property commissions crackdown. 

The FCA is to enforce a ‘near ban’ on commission being handed out in the property chain. 

Artemis Insurance Brokers managing director Ketan Patel said the problems in the market lay with the ‘big boys’, who had been making ‘silly amounts of money’.

He told Insurance Age last month: “They are all making silly amounts of money and it is both parties – the managing agents as well as the brokers.

“We all know the earnings they’ve been accustomed to, and on top of that, they charge fees.”

The FCA is now considering further investigations into captives following the property commissions review. 

Gallagher-owned Artex is one of the major players in arranging commission and risk-sharing schemes for people and companies in the property chain. 

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