We can see no good reason why the FCA could not have sought similar declarations on test scenarios involving broker negligence. Far from being theoretical problems, Mactavish has discussed exactly these types of errors and omissions with many policyholders over recent weeks.
A conflict of interest
The role of brokers becomes even more complex when one considers the way in which they are remunerated.
In a study we published in May this year, we built on the FCA’s own data to demonstrate that some brokers receive up to 80 per cent of their revenue from insurers and only 20 per cent in direct fees from clients.
As the British Insurance Brokers’ Association stated in response to our report, “Brokers are the agent of the client as well as the insurer and one of their fundamental roles under the Insurance Distribution Directive is to act in their customer’s best interests – which is exactly what they do”.
The obvious question is, ‘what happens when the interests of those parties come into conflict?’
It is difficult to imagine another sector in which an intermediary would be able to derive most of its income from one side of a financial or legal dispute, yet be completely certain that it always serves the interests of the other.
Yet this is the norm in the insurance industry.
Even worse, many of the arrangements broking houses have with insurers actually incentivise them not to act in the best interests of policyholders.
Firstly, the income they derive from placement of risks is often linked to the value of the premiums placed: as premiums increase, they stand to earn more.
Secondly, and incredibly, brokers often engage in ‘profit-sharing’ agreements with the insurers they place business with, meaning that any successful claims made by their clients will reduce their share of the revenue.
This is not an issue of brokers mixing commission and fee income – it is a far more complex web of opaque payments which drives the more serious conflict.
Some of the arrangements go even further.
In some cases brokers themselves provide the policy wordings which are then underwritten by the insurers in return for an agreed volume of business.
In those instances, the broker is really acting as a distributor for the insurer, rather than as an agent for the insured.
In fact, several such broker defined and branded wordings are being looked at it in the FCA’s action, but this nonetheless stops short of looking at the role brokers played in how those policies were presented and sold.
