Revisiting conflicts management following the FCA's Broker Market Study
On 20 February 2019, the Financial Conduct Authority ("FCA") published its final market study into the wholesale insurance broker market. The study, launched in 2017, considered competition, transparency and conflicts arising from changes in the market, including an increased use of broker facilities. The study relied on market responses and customer interviews, together with the FCA's own data. The final report is viewed as a success for brokers, given the limited criticism of broking practices. Now that the market has had time to assess the practical impact of the study, we focus on conflicts of interest management which was identified by the FCA as one area warranting further monitoring.
In the study, the FCA assessed conflict management under its operational objective of promoting effective competition in the interests of consumers. With this objective in mind, the FCA deemed the risk of client harm to be partially mitigated by a client's ability to obtain sufficient information to inform their decision-making. The FCA raised concerns that brokers are not articulating how conflicts are managed in their business models, including how risks posed to customers are mitigated. The FCA suggests that brokers should pay greater attention to conflicts where clients are introduced to new products as this is when the information demands of clients require careful assessment.
Among the conflicts policies reviewed for the study, the FCA identified just over a half as having a comprehensive range of conflicts. It was noted that many policies did not evidence efficient procedures, controls or management information which alleviated possible harm deriving from broker incentives to utilise specific placement structures. The FCA found that conflicts were not discussed in enough detail, or inappropriately focussed on personal conflicts rather than broker conflicts. Additionally, policies tended not to include adequate detail of internal controls for managing conflicts once discovered.
Conflicts management is one key aspect of the much publicised FCA's Conduct Risk theme and serves to flag pre-existing conflicts obligations under FCA rules. These include the Principles for Business, Systems and Controls rules and Conduct of Business rules, all recently enhanced following the implementation of the Insurance Distribution Directive ("IDD"). Broadly speaking, the IDD requires insurance distributors to identify, prevent, manage and disclose conflicts of interest when carrying out insurance distribution activities, but a higher conflicts standard is applied for insurance products with an investment component. To highlight the importance of conflicts management, the FCA applies the higher IDD conflicts requirements to all types of insurance.
In applying such higher standards, the FCA requires effective identification and management of conflicts of interest through 'robust control frameworks and effective policies'. Aside from conflicts policies, compliance may also be attained through transparency around remuneration – another key focus area for the FCA. In the study, the FCA highlights 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 this area, the FCA identified that firms' provision of client information was inconsistent and stated that it would use its supervisory powers to monitor this.
The FCA proposes continued active monitoring of conflicts management compliance. Governance on conflicts will therefore remain a fundamental obligation of firms, and brokers should seek to pay close attention to the implementation and review of their own conflicts policies to ensure compliance.
This article first appeared in Insurance Day