Property Owner’ s Insurance- Commission Distribution by Ash Patel
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Compliance with rules concerning the amount of remuneration( that includes commissions) that one might earn in relation to insurance products and services are fundamentally built on the regulator’ s high level principles for business, namely, principles 1, 5, 6 and 8 together with specific inducement and disclosure rules.
• Integrity: a firm must conduct its business with integrity.
• Market Conduct: a firm must observe proper standards of market conduct.
• Customers’ Interests: a firm must pay due regard to the interests of its customers and treat them fairly.
• Conflicts of Interest: a firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
In short, an inducement is a benefit offered to a firm, or any person acting on its behalf, with a view to that firm, or that person, adopting a particular course of action. This can include, but is not limited to, cash, cash equivalents, commission, goods, hospitality, or training programmes.
Importantly, a firm must therefore be able to demonstrate that any benefit or service they are providing is reasonably commensurate to the remuneration they are receiving.
The principal objective of this article is to raise awareness of what we are finding, specifically within the property owner and incidental insurance transaction sectors, concerning the distribution of commissions. The issue is complex and far wider reaching than thought, in particular with authorised intermediaries who have introducer appointed representatives and similar relationships; our experience is that unless these firms give the matter closer consideration it is likely to cause problems with the regulator in the future.
Examples of what we are finding include:
• Commissions paid-away in favour of the propertymanaging agent( PMA) or introducer where other than first introducing the customer, little or no other activity is completed by the PMA or introducer
• Trail commissions( commissions paid at each anniversary or renewal of insurance normally when the receiving firm has no contact with the customer)
• Excessive commissions( commissions are above the market norm)
• Premiums that do not reflect a fair value( better value comparable arrangements are widely available)
Our view is that these are not fair commercial practices; neither are they in tune with the spirit of the regulator’ s objectives for the financial markets.
We consider that these types of commission sharing agreements may impair compliance with the duty for a firm to ultimately act in the best interests of a customer, particularly if commission payments represent a considerable source of revenue. In such circumstances, commission payments may cause an introducer or agent to put its commercial interests ahead of the best interests of a customer.
We are also concerned that these types of payment do not generally enhance the end quality of service or product provided to the customer; importantly, disproportionate levels of commission sharing are likely to have the opposite effect and are likely to be detrimental to end customers.
For example: remaining commissions, the point after which an introducing firm or agent is paid, may become unsustainable for the firm providing the main service to a customer. They may not allow the firm to maintain adequate resources to provide a sufficient customer interface; in addition, it unnecessarily exposes the PMA or IAR to claims from tenants for excessive commissions and secret profits.
Worthy of mention is one of Britain’ s largest Leasehold Valuation Tribunals( LVT) cases from the Borough of Nottingham at City Heights Estate. Importantly, during the six-day trial, evidence in this decision( as far as insurance commissions were concerned) found that the PMA had entered into a financial agreement with Oval Insurance Brokers and Zurich Insurance to maintain arrangements at artificially high premiums in return for commissions of 33.05 % of the 45 % paid to Oval by Zurich.
Evidence demonstrated that comparable arrangements were available in the order of 42 % less premium and that commissions of only 15 % represented the actual cost of work carried out by the PMA. The court ordered the PMA to refund 6 years of unfair charging of up-to £ 188,000.