FCA publishes Terms of Reference for wholesale insurance broker study

On 08 November 2017, the Financial Conduct Authority (FCA) published its Terms of Reference for its Wholesale Insurance Broker Market Study. The FCA proposes to take a closer look at how competition works in the wholesale insurance broker market, as well as the influence of brokers on other parts of the industry.

The Market Study has been launched by the FCA in an attempt to refresh the work of its predecessor (the FSA) on the wholesale insurance broker sector of ten years ago. The FCA believes that the market has significantly evolved since then, including the fact that brokers have developed a range of new services for both clients and insurers.

Key themes

The FCA wants to examine whether clients are able to access the best insurance terms available from the industry. Competition should, in theory, keep brokers’ fees and remuneration at competitive levels, which should correspond to lower premium costs for clients. The FCA plans to focus on three key issues in examining the conditions of competition on the market:

• Market power - the FCA plans to explore whether brokers have market power that they might be able to use to restrict competition eg receiving higher commissions than they otherwise would in a more competitive market. The FCA also plans to look at the barriers to entry, whether a broker’s expertise and access to information gives a specific broker a competitive advantage and how broking firms can take advantage of economies of scale and scope.
• Conflicts of interest - Brokers are often relied upon to bridge information gaps between commercial clients and insurers. The FCA is concerned that brokers are incentivised to choose insurers for their clients which provide the broker with a greater remuneration, instead of the most appropriate insurer for the client and plans to explore the potential of conflicts of interest in more detail.
• Broker conduct - the FCA considers that there are certain broker practices which might exclude insurers from the market or dampen competition between brokers through tacit coordination.

Types of customer

The FCA has expressed an intention to focus upon two broad end-customer types within the industry:

• Retail micro-enterprises and small and medium sized enterprises (SMEs) - these types of end customers usually deal with high street, regional or telephone/online only brokers, but their risks can often be pooled together and placed onto the London Market, which is what the FCA intends to focus on.
• Corporate clients - corporate clients typically have complex insurance needs and therefore directly access wholesale insurance brokers.

Comment

This is the latest in what is becoming a long line of market studies by the FCA. Some of the areas of enquiry in this new market study - potential conflicts of interest between brokers and their clients which mean that their interests are not necessarily aligned in order to deliver the best deal to the client - are topics in which the FCA has shown an interest in other studies.

Next steps

The FCA is not formally consulting on the Terms of Reference, but is happy to take industry views and opinions. Any feedback on the Terms of Reference should be submitted to the FCA by 19 January 2018.

The FCA hopes to have an interim report by autumn 2018, which will identify any preliminary conclusions and possible remedies (if it feels these are necessary).

The competition team has experience of advising on market studies in front of the FCA. Please feel free to contact us if you have any questions or would like to discuss any of these issues.