FCA closes insurance broker market study – brokers pass with flying colours (almost)!

On 8 November 2017, the FCA launched a wholesale market study to assess how competition was working in the broking sector, specifically in respect of insurance and reinsurance for large, complex and specialist risks in both Lloyd’s and company markets.

The FCA’s study was driven by several potential concerns including:

  • High levels of concentration in the market leading to some brokers being able to exercise market power and higher profits.
  • Brokers imposing restrictive clauses in their contracts with insurers.
  • Brokers receiving higher revenue for business places through placement facilities or MGAs as opposed to the open market, contrary to the best interests of their clients.

As reported in our previous article, the study focused on:

  • How brokers compete in practice and whether they used their bargaining powers to get the best deal for clients.
  • What conflicts of interest exist, how they are managed and how they affect competition and outcomes for clients.
  • How broker conduct affects competition in the sector.

The findings

A total of 73 brokers and 49 insurers responded to the FCA’s questionnaire on the above issues and there were 27 responses to the FCA’s Terms of Reference. The FCA also commissioned independent research and had discussions with firms and other stakeholders such as trade bodies.

Somewhat unusually, the FCA decided to close their study and publish a final report. This only happens in “exceptional” circumstances. In this instance, the FCA decided that their finding of a lack of material evidence of harm and need for regulatory intervention made the situation exceptional.

The FCA’s decision has been welcomed by the British Insurance Brokers’ Association – BIBA’s Chief Executive commented that the FCA’s decision “validates our view that the wholesale insurance market is a highly competitive place… and our members will be pleased to see that the regulator recognises that the sector meets client demands successfully”.

The FCA’s final report concluded that there was no evidence of “significant levels of harm to competition that merit the introduction of intrusive remedies” (i.e. the launch of an official investigation or reporting to the Competition Commission) albeit there are three areas where there is room for improvement:

1. Management of conflicts of interest

The FCA concluded that some brokers’ conflict of interest policies set out conflicts and mitigating factors at high level but do not set out how the conflicts will be managed. The FCA will work with firms in reminding them of their obligations under the FCA rules.

2. The information brokers disclose to clients

The FCA’s analysis showed that brokers receive higher remuneration rates from placing risks into their own facilities/MGAs (about 8% of GWP), as opposed to in the open market. Whilst this is not currently harmful, the issue could be mitigated through effective conflict of interest policies, wich, for some brokers, were found to be inadequate. The FCA will remind firms of the need to communicate with their clients in a “clear, fair and not misleading way”.

3. The contractual arrangements between brokers and insurers

A small number of contractual agreements were identified as potentially anti-competitive as they sought to limit how insurers engage with other brokers. They intend to follow up with the individual relevant firms and then consider whether any additional steps are required.

The future

As highlighted in the FCA’s report, a competitive broking market benefits policyholders and makes the UK an attractive place to do business. The impact of Brexit on the placement of insurance in the UK market remains to be seen, but a clean bill of health must surely be seen as a positive for those continuing to look to the London insurance market, particularly for placement of large, complex or unusual risks that domestic insurers may steer away from.

Read other items in Professions and Financial Lines Brief - June 2019

Related item: FCA launches insurance brokers market survey