On 20 February 2019, the Financial Conduct Authority (FCA) published its final report closing its market study into the wholesale insurance brokers market, in an unusual step which could largely be regarded as a success for brokers given the limited criticisms of broking practices in the FCA’s report.
For the first time since it became a concurrent regulator, the FCA decided to issue a final report instead of an interim one, after finding no clear evidence of significant levels of harm to competition in the market – circumstances which it considers to be ‘exceptional’. However, the FCA did identify certain areas warranting further monitoring and follow-up: conflicts of interest, information provided to clients and certain (potentially anti-competitive) clauses in broker agreements with insurers.
With an estimated £60 billion of gross written premiums controlled by the London insurance market, London is one of the largest global centres for placing and underwriting complex commercial and speciality risks. However, the FCA’s study focussed on five key areas in the wholesale insurance brokers market:
- market power
- pay-to-play (brokers compelling insurers to sign up to consultancy-style service agreements to win placement business, or requiring them to participate in placement facilities)
- onerous conditions in contractual agreements
- conflicts of interest
- coordination between brokers.
No significant lack of competition in the market
The FCA noted in aggregate the wholesale insurance broker market was not highly concentrated, but there was evidence of high concentration levels in certain segments involving specific risk classes and risk codes, such as aviation, energy and casualty finpro. However, this evidence, and the FCA’s conclusion that there was no evidence of excessive profitability, nor large enough barriers to entry, led the FCA to decide that there was not a significant lack of competition overall in the market, at least at this stage.
The FCA also stated it did not have enough evidence to warrant an intervention at present into pay-to-play.
As regards potential coordination and softening of competition between brokers, which the FCA flagged as an industry concern in its Terms of Reference, it concluded that tacit co-ordination between brokerage firms was unlikely, owing to the characteristics of the industry.
Potential compliance issues for wholesale insurance brokers
However, the FCA did highlight potential issues with conflicts of interests and certain restrictive clauses in contracts.
The FCA identified concerns that brokers were not articulating how they would manage conflicts of interest in their business models, including how they would mitigate the risks that these pose to customers. In particular, firms needed to pay greater attention in areas where they introduced new services and revenue streams and to carefully consider the information needs of their clients. One area focussed on by the FCA was the provision of information to clients using placement facilities or managing general agents, where the broker has the potential to earn higher remuneration than for transactions in the open market. In these circumstances, clients need to be given enough information to allow them to take informed decisions. The FCA identified that firms' approaches in this area were inconsistent and stated that it would continue to use its supervisory powers to monitor this.
On restrictive clauses, the FCA examined two types of clauses: ‘most favoured nation’ clauses (clauses stipulating that insurers could not offer better terms on the open market or that they must work with brokers to ensure that the terms of the facility remain market-leading) and client exclusivity clauses (clauses restricting insurers from providing quotes directly to clients of the broker or to other brokers about these clients). Interestingly, the Competition and Markets Authority (CMA) is also investigating the use of most favoured nation clauses in the home insurance market (see our report on this here). Similar to the CMA’s case, the FCA has concerns that these clauses could lessen competition, and ultimately affect consumers by causing high prices. The FCA noted that it would liaise with the small number of firms found to have these restrictive clauses in their contracts and consider whether further action is needed.
The FCA also examined insurers’ concerns that brokers were requiring insurers to place facultative reinsurance of the same risk with their brokerage services. However, the FCA could not find any evidence of this, despite acknowledging that there may be some circumstances where this problem could arise.
The FCA still has several ongoing investigations into the insurance industry, including studies on pricing practices and the general insurance industry. Owing to the dynamic nature of the wholesale insurance broker market, the FCA also acknowledged that several factors, such as Brexit and further mergers of brokerage firms, may lead it to re-examine the market in the future. In the meantime, brokerage firms should pay careful attention to their management of conflicts, the disclosure of information to clients and the use of restrictive clauses in their contracts.