The FCA does not need to fix what isn't broker-n

News / / The FCA does not need to fix what isn't broker-n

BackgroundOver the last ten years, the wholesale insurance market has been changing in response to a range of factors The FCA's concern was that these changes may have had ramifications for the way in which competition works and the level of competitive pressure experienced by brokersThe Study focused on five areas of potential concerns 1) market power 2) pay-to-play 3) onerous conditions in contractual agreements 4) broker conflicts and 5) broker coordinationFindings were drawn from a broad array of sources, including analysis of quantitative and qualitative data obtained from brokers and insurers, responses to the FCA's Terms of Reference, remuneration econometric analysis, financial analysis assessing brokers' profitability and business models, pay-to-play analysis, and client researchFurther details as to the study's methodology and findings can be found hereSummary of findings1)nbspnbspIt was found that there is no general over-concentration of power in the wholesale insurance broking sector, though there is evidence of high concentration levels in some market segments No evidence of excessive profitability was found, although as firms grow, their average margin improves There are some barriers to entry and expansion in the market which may adversely affect competition but the barriers are not large enough to lead to a significant restriction of competition Additionally, clients appear to be able to exert a reasonable constraint on brokers, limiting potential harm that could arise from broker market power 2)nbspnbspThere was insufficient evidence for the FCA to conclude that pay-to-play exists at scale, or that there is currently any basis for FCA intervention 3)nbspnbspSome onerous contractual clauses were identified which could restrict competition in certain circumstances The FCA noted that this was a potential concern, though seemingly not a market-wide issue it intends to follow up with individual relevant firms, then consider appropriateness of additional steps4)nbspnbspWith regard to broker conflict (for example in placing risks into their own facilitiesMGAs and receiving higher remuneration), the FCA did not find a systemic issue but wants to remind firms that they must manage conflicts of interest It found that not all brokers' conflicts of interest policies demonstrated the same level of completeness in identifying the relevant conflicts inherent to their business models It was not always set out how conflicts would be managed, which has implications for whether there are appropriate control frameworks in place The FCA also wants to remind firms that they need to consider the information needs of their clients and to communicate in a clear, fair and not misleading way 5)nbspnbspThe FCA found that tacit coordination between firms is unlikely, given the industry's characteristics Essentially there is no cartelConclusion Overall, the FCA concluded that the market study has not found evidence in relation to competition concerns warranting the introduction of intrusive remedies The issuance of a conclusive final, rather than interim, report demonstrates a confidence in the market and in its treatment of clients Going forward, the FCA has stated that it will continue to monitor the market to determine at an early stage whether regulatory attention is required It also plans to assess the impact of EU withdrawal on the market, and possible further consolidation in the industry and their impact on business models Therefore, while the report was decisive and final, it does appear that there is further work to be doneArticle authorsLucy Espley, Alex Davidson

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