FCA issues warning to insurance intermediaries over SMEs

The FCA has issued a warning to commercial insurance intermediaries, regarding conflicts of interest with SMEs.

Research conducted by the body has prompted the FCA to conclude that unaware small businesses using insurance intermediaries could be duped into over-paying or buying products unnecessarily because the intermediary has not responsibly managed the conflict of interests.

The body has called on intermediaries to be responsible in managing conflicts of interest when dealing with small businesses as clients.

Clive Adamson, Director of Supervision at the FCA, said:

"Small businesses are experts in their particular field but are often not experienced in buying insurance.

“That is why they need to be able to trust their insurance intermediary to act in their best interests. If there are conflicts of interest that are not identified or properly managed, that trust is put at risk.”

Certain lines of insurance such as those relating to commercial property, residential property owners and landlords were found to attract very high rates of commission, despite the relative lack of complexity in broking those products.

More than 65 per cent of firms surveyed believed that intermediaries acted as their agent when selecting and placing their insurance.  When in fact the professionals can also act as agent for the insurer.

The FCA wanted to establish how the flow of revenue from insurers or other sources to intermediaries could affect how customers were treated.

 It discovered that in these scenarios:

•    There was an increased risk of conflicting interests where intermediaries fulfilled multiple roles in the distribution chain and acted as agent for both the customer and insurer in the same transaction;
•    The control framework and management information in some firms had not developed in line with changes in the size and complexity of the business;
•    Some intermediaries relied on disclosure as the main way to address conflicts of interest rather than having effective control frameworks in place;
•    Disclosure provided to customers was sometimes very generic and unlikely to meet their information needs or enhance their understanding; and
•    Conflicts of interest were not always effectively mitigated in relation to add-on insurance or services, premium finance or where the cost of insurance is borne by a third party

The research included seven of the largest intermediaries who serve small business clients.