UK: FSA Confirms Trial Of Enhanced Disclosure Under Insurance Industry Codes

Last Updated: 23 December 2008
Article by Paul Edmondson, Maxine Cupitt and Jodie Smith

On 16 December, FSA published its feedback statement on transparency, disclosure and conflicts of interest in the commercial insurance market (FS08/7). This is the latest development in the long running debate about:

  • Brokers' remuneration and commission disclosure;
  • The role of brokers and intermediaries and the potential confusion about the services which they provide to insurers and to insureds;
  • Conflicts of interest in the commercial insurance market;

FSA has confirmed that it will trial an industry solution to see if this can resolve FSA's concerns. This will take the form of industry guidance and codes of practice issued by trade bodies (BIBA, LMBC, ABI) and endorsed by FSA. FSA has set out its expectations for enhanced disclosure to clients prior to entry into new policies renewals. If the industry initiative is successful, it will avoid the need for more prescriptive FSA regulation (such as rules requiring prior commission disclosure). The impact of the initiative will be reviewed in 2010/2011.

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On 16 December, FSA published its feedback statement on transparency, disclosure and conflicts of interest in the commercial insurance market (FSA08/7). The full paper can be found here.


This is the latest development in the long-running debate about:

  • Brokers' remuneration and commission disclosure;
  • The role of brokers and intermediaries and the potential confusion about the services which they provide to insurers and to insureds;
  • Conflicts of interest in the commercial insurance market.

Industry Solution – BIBA and trade association codes of practice

FSA has confirmed that it will trial an industry solution to see if this can resolve FSA's concerns. This will take the form of industry guidance and codes of practice issued by trade bodies (BIBA, LMBC, ABI) and endorsed by FSA. FSA has been working with the industry trade bodies, and has set out its expectations for enhanced disclosure to clients prior to entry into new polices and renewals. Draft codes have been circulated and formal publication is expected early in the New Year.

In its response FSA sets out quite detailed proposals as if these to be were new conduct of business requirements; the implication appears to be that it will be for the trade bodies to bring about these changes through industry guidance.

The threat of more prescriptive FSA Rules

For the time being, therefore, the industry has seen off more prescriptive rules within the FSA Handbook. There are, of course, already extensive requirements, both high level (such as the Principles for Businesses and FSA's SYSC requirements) and more detailed rules (such as those in ICOBS). FSA will review the impact of the industry codes in 2010/2011. If this has not achieved the desired result, then it will consider the possibility of introducing more prescriptive FSA rules. Some were concerned that FSA would introduce a broad requirement for compulsory prior disclosure of commission; this will not now be introduced, at least in the short term.

FSA concerns and expectations

FSA has summarised its expectations in six "outcomes" –

  • Customers should have clear and comparable information about commissions;
  • Customers should have clear and comparable information about the intermediaries' services;
  • Customers should have clear information on the capacity in which the intermediary is acting;
  • Customers should be alerted to their right to request commission information; and
  • Customers should be made aware if there is a chain of intermediaries.

These issues are considered in FSA's response to the feedback to its discussion paper published in March 2008. The March paper can be found here.

FSA has set out the enhanced disclosures it expects to see under the industry codes. Although these requirements will not be in the form of prescriptive rules, brokers and intermediaries will have to change their processes to incorporate the enhanced disclosures as a "prominent part" of the process for "selling" new policies and renewals.

There is therefore keen interest in the final terms of the industry codes. For example, there is likely to be an emphasis on the need for a client's informed consent to broker remuneration beyond the small print in TOBAs and relying on "market custom".

Enhanced disclosure in the sales process

1. Operation of the market

FSA remains concerned about a lack of transparency in the commercial insurance market, the Law Commissions and the European Commission also have unresolved concerns about this sector.

FSA is not concerned about an "uneven playing field" as between insurers and intermediaries arising from the enhanced disclosure regime for intermediary commission and remuneration. This is because insurers only advise on their own products.

FSA has also confirmed its previous policy of giving commercial customers enhanced rights to information about broker/intermediary remuneration, as compared with the rights of retail customers under ICOBS.

2. Remuneration arrangements

CRA International Ltd ('CRA'), which carried out a report for FSA, identified commercial customers with a turnover of between £0.5m and £100m (the "middle-segment) as being at risk of detriment from non-disclosure of intermediaries' commissions. These customers account for around £1.9bn gross written premium per year and represent about 50% of the UK's commercial insurance market.

FSA believes customers should be alerted to their right to receive commission information and have access to clear and comparable information about the commission intermediaries receive. FSA believes that clients should be alerted to their right to request commission information in good time before the contract is concluded and that this alert should form a prominent part of the sales process; if the broker is dealing over the telephone, then the customer should be alerted orally at that stage. This will need to be repeated at renewals.

The information will include both standard commission and all forms of contingent remuneration.

3. Management of conflicts of interest

FSA will be continuing to give close supervisory attention to the management of conflicts of interest, particularly in relation to intermediaries with business models where it considers the potential for conflicts is higher. Brokers with managing general agency ('MGA') arrangements, and those with binding authorities for underwriting or claims, are obvious examples.

FSA has not found major problems with contingent commissions as these only account for a small amount of intermediaries' overall income and, in general, firms' conflict management arrangements appear adequate.

FSA believes it would be appropriate for intermediaries, such as producing brokers, to make clients aware of the existence of chains (in the same way that they alert customers to their right to request commission disclosure); there is a concern that clients may not be aware that a chain of intermediaries may be used and may need to reassure themselves that the intermediary is acting in their best interest when deciding to use a chain, for example a placing broker when a producing broker uses a placing broker.

4. Capacity disclosure

FSA believes clients should be given clear information about the capacity in which an intermediary or broker is acting; it found that clients often did not realise that the intermediary may be acting in different capacities. FSA believes that the intermediary should explain whether they are or will be acting as the agent of the client or of the insurer over the lifetime of the policy, including in the claims process. It may be, therefore, that an intermediary will need to disclose to an insured at the time of placing the risk that it may undertake work for the insurer at a later stage, eg. in relation to claims handling or settlement or administration work such as issuing policy documentation. Where the roles may be unclear, the intermediary should explain precisely its relationship with the insurer to the customer. This information should be provided with the other material above and form a prominent part of the sales process for new contracts and renewals.

Industry codes and guidance will have to cover a diverse range of intermediary services from top-end full market placement to MGA distribution and limited quote services for the smaller end of the market.

5. Services disclosure

FSA wants greater clarity about the services provided by brokers and intermediaries, including the nature and breadth of the search which they conduct for insured clients when seeking to place risks with insurers. FSA wants this information provided on a comparable basis across firms. There are existing ICOBS requirements, but FSA wants to see these aspects being given greater prominence in the sales process, with clear information as to how a broker or other intermediary is searching the market on behalf of the insured client.

6. Increasing client understanding: consistency, comparability and education

FSA wants to see the enhanced disclosures referred to above, provided in a manner that aids comparability.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 18/12/2008.

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