Authority decides "not to mandate commission disclosure at this stage," BIBA expresses frustration with ongoing review

The Financial Services Authority has today announced a further programme of work to consider possible inefficiencies in the commercial general insurance market before taking a decision on whether to mandate commission disclosure.

This follows an independent report which suggests mandating commission disclosure by itself is not justified on cost benefit grounds. However, the FSA has wider concerns about market inefficiencies.

Under the FSA's current rules a commercial insurance broker must disclose commission information if the client requests it. In March 2007 the FSA commissioned CRA International (CRA) to conduct a forensic market failure and cost benefit analysis into whether commission disclosure should be made mandatory. The subsequent research did not find that the benefits from mandating disclosure alone would equal or surpass the costs. However, CRA found a lack of transparency in commissions paid to intermediaries in the commercial general insurance market which gives rise to market imperfections, for example, many medium-sized customers do not know how much commission they pay.

Hector Sants, chief executive officer, said: "CRA's research concludes that the costs of mandating commission disclosure appear to outweigh the benefits. Given this research, we have therefore decided not to mandate commission disclosure at this stage. However, we still have concerns around transparency and wider market efficiencies and will continue to keep the matter under review.

"In particular we believe the effective management of conflicts of interest has never been more crucial. The increased blurring of the distinction between insurers and intermediaries increases the need for conflicts of interests to be managed. This is a concern that has also been raised by the European Commission following its recent inquiry into business insurance. On this basis we plan to consult with the industry early next year."

The British Insurance Brokers Association (BIBA) expressed frustration with the FSA’s ongoing commission disclosure review.

Eric Galbraith, BIBA Chief Executive, said: ‘The commercial insurance market is now more transparent than ever before. The work undertaken by BIBA in respect of managing conflicts of interest and use of our prescribed TOBA wording has led to increased levels of transparency for commercial customers.’

The association said that the costs of mandatory disclosure fall disproportionately on smaller firms and exceed the benefits. And it continued to stress that a market solution was the preferred way forward.

Steve White, BIBA Head of Compliance & Training also expressed concern that the FSA was considering greater levels of protections for commercial customers than retail customers. He said: ‘We believe that they should be more concerned with protecting the individual, rather than the professional buyers of insurance.’

FSA work next year will focus on:

Measures aimed at improving the quality, clarity and consistency of key disclosures made by firms to their commercial customers. This will include disclosures relating to commission, status, service, and conflicts of interest.

Thematic work on conflicts of interest. This work will consider the extent and nature of conflicts that arise from commission paid by insurers to intermediaries.

The publication of a Discussion Paper inviting views on the cost-benefit analysis of mandatory disclosure. This will take into account questions on the wider issues of market efficiency and fairness along with the potential benefits from having more standardised disclosures.

The FSA will also be investigating ways to raise commercial customers' awareness of the value of commission information disclosed by intermediaries.

These measures will only be considered within the context of commercial general insurance. The timing will take into account any developments in Europe regarding the review of the Insurance Mediation Directive.