As the FCA prepares to commence its review into wholesale brokers, The Journal examines the possible outcomes
This autumn will see the Financial Conduct Authority (FCA) issue its interim report on the London market's wholesale insurance brokers.This autumn will see the Financial Conduct Authority (FCA) issue its interim report on the London market's wholesale insurance brokers.
The regulator's 2018 business plan reiterated the importance it places on its review into the sector. The regulator says its review into wholesale insurance brokers, which are responsible for placing the majority of the £68bn in premiums underwritten in London every year, will concentrate on three main areas -- pricing levels, conflicts of interest and broker facilities -- amid concerns that it fails to deliver value for money and is skewed towards larger players.
It could result in a wide range of outcomes, from a boost to the market's competitiveness in the international arena to a full-blown investigation conducted by the Competition and Markets Authority (CMA).
FOSTERING INNOVATION
When it announced the review late last year, the FCA said it wanted to ensure the sector was "working well and fosters innovation and competition in the interests of its diverse range of clients".
"Given the size of the wholesale insurance sector and the type of large-scale risks it covers, the way it functions can have a wide-ranging impact on the broader economy. If businesses cannot get appropriate cover or pay more for services than they should, it can impact on their ability to operate and grow," says Christopher Woolard, FCA executive director of strategy and competition.
The FCA acknowledges that the size of the wholesale insurance sector and the nature of the risks covered mean that "the way it functions can have a wide-ranging impact on the broader economy."
The regulator also notes that it has been a decade since the sector was last reviewed, during which time there have been numerous developments. According to the FCA, these developments include the evolution and growth of the volume of business being placed into alternative facilities.
Other changes the FCA has noted are an increase in broker remuneration despite declining premium rates and the rise in broker offerings in terms of additional, non-placement services -- such as advisory, data and analysis services.
The FCA says it is taking a broad approach as to what constitutes wholesale insurance for these purposes. It is looking "to include risk business from overseas and the UK, placed by brokers with Lloyd's syndicates and insurance companies operating in the London insurance market."
Risks include:
- Large, complex or speciality risks, which usually require an element of bespoke pricing and coverage;
- Portfolios of retail, SME and smaller corporate business placed in blocks on the London insurance market (such as surplus lines business from the US);
- Reinsurance -- both treaty and facultative.
BROAD SCOPE
"This is an important study for the FCA in reviewing how the wholesale insurance market works for all participants. The scope is broad and interestingly includes reinsurance, giving the FCA the opportunity to understand the interplay between insurers and brokers across the whole of the market, rather than assessing each in isolation," says David Miller, a regulatory insurance partner at KPMG UK.
Mr Miller adds: "The FCA will be speaking to a wide group of stakeholders, including insurers and end clients, to get a fuller picture of the impact of some specific services and practices which have developed in recent years, including broker facilities. It will also be an opportunity for brokers to demonstrate the value they bring to the market and to clients."
The market study could lead to the sector being given a clean bill of health. However, if the FCA were to conclude ultimately that the wholesale insurance broker market is not working well, it has a wide range of options at its disposal.
These include changes to the rules regulating brokers, publishing general guidance or imposing firm-specific remedies.
In addition, if the FCA were to uncover anti-competitive behaviour as part of its investigation into how the market is working generally, it could then liaise with the CMA about commencing competition investigations into individual firms.
AREAS OF CONCERN
David Harrison, a partner in the London office of law firm Mayer Brown, says: "It is noteworthy that the FCA has referred to some specific areas of potential concern, in particular the possibility of tacit coordination and indirect information-sharing between brokers. This suggests that the FCA might have specific types of conduct in mind. It will be looking closely at business practices to see if they are in line with competition law."
Mr Harrison continues: "There is a risk that certain practices that may have been the norm in the industry for a long time will now be called into question. In particular, forms of information exchange or coordination that have not have attracted attention in the past might now be deemed unlawful. Any broker in the sector should be considering the compatibility of its practices in light of the competition rules.
He concludes: "It is ultimately best for the health of a sector if there is a competitive marketplace."