“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.” (Clive Adamson, Director of Supervision at the Financial Conduct Authority)
The FCA has focused a recent review on insurance selling to small business customers. It stated that they have more complex insurance needs than retail clients but are not always more sophisticated buyers of insurance. Small businesses often rely on insurance intermediaries for advice, where actually an independent adviser may be a more suitable source of assistance. The FCA wanted to establish how the flow of revenue from insurers or other sources to intermediaries could affect how customers were treated. It found that:
- there was increased risk of conflicting interests where firms 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.
Consumer research also revealed that small businesses are not aware of the differing roles intermediaries can perform. Many (68%) believed that intermediaries acted as their agent when selecting and placing their insurance. Further, a large majority (86%) of small business policyholders expected their insurance intermediary to search for more than one quote, which was not consistent with placement processes within some intermediary firms.
The FCA is concerned that if conflicts are not properly managed there is the risk that decisions are made in the interest of insurance industry firms rather than their small business customers. This could result in some small businesses over-paying or buying products they don’t need. Whilst the FCA’s review has focused on larger firms, all intermediaries should take note of the findings and ensure any conflicts are appropriately managed. The regulator will be working closely with the industry to communicate the results of the review and, with the firms involved, will use appropriate regulatory tools to address specific issues.