UK: Broker Commission Disclosure - Tougher Stance

Last Updated: 14 July 2008
Article by Tim Brentall and Alex Booth

The FSA will have to tread carefully on commission disclosure to avoid disadvantaging UK brokers, argue Elborne Mitchell's Tim Brentnall and Alexandra Booth.

Until recently, it seemed the Financial Services Authority (FSA) was set against mandatory commission disclosure by brokers to commercial customers; but their recent discussion paper signals a possible change of heart.

While previously the FSA's view was that the benefits of mandatory disclosure were not sufficiently high to justify the cost to the industry, the regulator is now suggesting that imposing yet more onerous requirements could increase the benefit enough to make the cost worthwhile. The focus has widened from disclosure of commissions earned by a customer-facing broker on a particular piece of business to include commissions earned by every broker in a chain and on contingent commissions.

The suggestion is that all customer-facing UK based intermediaries should automatically provide commercial customers with information in cash terms about the total commission payable through the whole chain (although not how it is shared). That begs a number of questions.

The FSA proposes that the obligation to disclose total commission would be placed on the insurer but with permitted delegation to the customer-facing intermediary. They acknowledge that wholesale intermediaries might need to facilitate the process where there is a long chain – but how will that be enforced outside the UK?

The suggestion is that the customer-facing intermediary will discharge its commission disclosure obligation provided that it has used "best endeavours" but the question of what that entails is left open. Will the proposals perversely lead to further "legislation-arbitrage" by encouraging the deliberate siting of the customer-facing intermediary offshore in amore relaxed regulatory environment? Alternatively, the FSA is considering whether the insurer should be required to provide commission information as part of the policy documentation after the point of sale – but given that the customer will already have entered into the contract the benefits of this approach appear distinctly doubtful.

On the question of contingent commissions the FSA is concerned by anecdotal evidence that brokers are telling commercial customers that they may receive additional commission on a profit or volume related basis without giving any details of how it will be calculated.

Clear Indication

The regulator accepts contingent commissions are dependent on a future event as they are typically paid across a book of business with a precise figure not always available at the point of sale. But in their view the broker should give the customer a clear indication of the likely amount payable, calculated in cash terms on a standardised basis – perhaps the maximum amount an intermediary stands to make if there are no claims, or a historical average of what the intermediary has received in a previous period?

There is a large question mark over whether such information will be meaningful to a customer whose insurance may be an extremely small part of the book of business which is the subject of a contingent commission arrangement. Doubtless it is information that will be of interest to competitors, but would it drive down commissions for the benefit of customers?

And on the issue of competition, Concerns must also be raised over the prospect of the FSA once again "gold plating" regulatory standards and moving ahead of their European counterparts. The FSA discussion paper identifies the perceived lack of commission transparency as potentially creating an unlevel playing field.

International intermediaries who disclose voluntarily have argued that a lack of mandatory commission disclosure gives UK intermediaries an unfair advantage. But how many international intermediaries are disclosing voluntarily? A distinctly unlevel playing field in favour of non-UK intermediaries may result if the FSA decides to impose mandatory commission disclosure in the UK in the absence of comparable rules elsewhere.

The FSA's approach to contingent commissions differs from their colleagues in the US who have opted for prohibition not disclosure. That said, Marsh, Aon and Willis have recently reached an agreement with the New York attorney general over contingent commission arrangements of newly acquired brokers.

They had complained that they were at a competitive disadvantage, because while they have phased out contingent commissions, smaller brokers have not done so and when bidding to acquire other brokers would look to maintain the income stream from the target company's contingent commissions. Under the new arrangements, the big three brokers will also be able to take the benefit of the target company's contingent commissions for three years, giving the man opportunity to restructure remuneration arrangements.

The fact that the New York attorney general has agreed the deal seems an admission that contingent commissions are still rife throughout much of the US insurance industry, certainly below the top tier of brokers. This suggests that the FSA should tread warily in going down the path of forced disclosure or run the risk of putting UK brokers at a competitive disadvantage worldwide.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.