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 .