Treating customers fairly (TCF) continues to remain central to the FCA’s focus and is a fundamental principle that insurance broking firms need to adhere to. However, under examination, are we all confident that is this being adopted in all cases?
Brokers are expected to embrace the TCF culture and embed the six so-called “outcomes” into their day-to-day operations. In summary, the FCA’s overarching principle demands that “A firm must pay due regard to the interests of its customers and treat them fairly.”
With this in mind, let us consider the following two scenarios..
A general commercial insurance brokerage whose main activity is with SME commercial combined business also has a professional client. Let us say this is a chartered surveying firm. With his focus on manufacturing and warehousing risks, our broking firm only has three available agencies for PI business. He receives renewal terms from the holding market, and also undertakes a market exercise to the two other available insurers. The best quote secured amounts to £25,000. This is presented to the client, which is accepted, and cover is bound. Our broker receives 17.5% commission on the gross premium from this direct insurer placement – i.e. £4,375.
This same broker for this same risk decides to use a specialist wholesale PI broker who has, as a result of the volume of PI business placed, much wider market access including company insurers, Lloyd’s syndicates and specialist PI MGAs. The wholesale broker, after an extensive market exercise, secures a quote for £18,000 (on the same AOC Indemnity Limit, excess, policy terms and conditions). These terms are emailed to our retail broker, with the agreed allocation of the overall 20% commission split between the two parties 50/50 – so 10% of GWP to our broker. These more advantageous terms are presented to the Insured, who confirms acceptance and cover is bound. Our broker receives £1,800 commission.
Questions we must ask
Question: Has the Insured been fully treated fairly in both scenarios? Or is it the case that (to paraphrase a well-known saying) all clients are being treated equally fairly, but perhaps some clients are being treated more fairly than others?
Under scenario 1, the Insured believes that they have been provided with a competitive premium as our broker has explained he has sought alternative quotes and thus considers that their client has been treated fairly. They have not been complacent and merely offered renewal terms from the holding insurer but have sought alternatives for comparison (albeit from only a limited number of insurers).
He would naturally be aware however that many brokers specialise in certain business class areas, have greater experience in that particular area, have a wider insurer agency base and will offer a wholesale facility to retail brokers. This includes specialist PI brokers.
What should the broker do? Is this compliant with the spirit of TCF? Is there a moral dilemma here? Should the broker realise his limitations for any professional clients and that he cannot “be all to everyone”? Does he need to disclose how many potential markets he has access to for this PI client? Should he be obliged to use a specialist wholesale PI broker (in order to obtain the best possible solution for his client) and therefore be bound to accept a reduced income on his P&L?
It is not to say that a brokerage firm should sub-broke all business to specialist wholesalers. Yes, there are specific schemes available which would be accepted and understood outside the general broker’s agency base (and ability to secure the correct cover), for example, an intruder alarm installer client who requires efficacy cover, but how should our broker be guided in this instance? What should he base his decision upon? He understands PI and feels competent to advise on it but is also aware that his firm does not focus in this area, and so has limited business to access a wide number of carriers.
The decision is a tough one and will prey on many people’s minds. But, for example, how would the directors of our broker firm explain their position, and business strategy, to the FCA, if call upon to answer? The answer is not an easy one, nor perhaps able to be fully answered, but certainly food for thought.
Byline by Richard Packman, director of specialist insurance brokers, Cox Mahon Limited