The Australian Securities and Investments Commission (ASIC) today released the results of a review of the remuneration practices of general insurance brokers.
The review did not find any evidence of the kind of systemic abuses uncovered in the United States recently. However, ASIC did identify some deficiencies in relation to Australian brokers’ management of conflicts of interest and disclosure of remuneration. The review also highlighted the inherent conflict in the practice of paying volume bonuses or other types of contingent remuneration to brokers.
‘ASIC found that more than half the brokers reviewed had contingent remuneration arrangements in place and most of those brokers placed a significant proportion of their business with insurers that paid extra commissions based on the volume of business placed with them’, ASIC’s Executive Director of Compliance, Ms Jennifer O’Donnell said.
Australian law imposes strict requirements on insurance brokers to tell clients about remuneration incentives received from insurers. Where contingent and preferential remuneration arrangements are significant to broker revenue or profit, merely disclosing the conflict and imposing internal controls may not be enough. In such cases, the only way to adequately manage the conflict may be to avoid it. The appropriate arrangements will always depend on the circumstances.
‘The review noted that contingent commission arrangements have increased, so the management of conflicts of interest and disclosure of remuneration by insurance brokers will continue to be the subject of regulatory scrutiny’, Ms O’Donnell said.
ASIC will be performing follow-up work as a result of the review and will continue to monitor broker activities, particularly in relation to management of conflicts of interest and disclosure of remuneration.
In subsequent reviews, ASIC will expect to see robust conflict management arrangements. Where disclosure is appropriate to managing conflicts of interest, ASIC expects to see disclosure that is timely, specific, prominent and meaningful.
In administering the law, ASIC will take into account the proposals put forward in the Federal Government’s proposals paper Refinement to Financial Services Regulation, issued in May 2005: see ASIC Information Release [IR 05-28] ‘ASIC compliance guidance on the FSR refinement proposals and fees template requirements’.
ASIC’s report on insurance broker remuneration arrangements is available from the ASIC website at www.asic.gov.auor by contacting the ASIC Infoline on 1300 300 630.
Background
In 2004, the New York State Attorney General investigated allegations that some insurance brokers in the United States were encouraging their staff to place business with preferred insurers that paid them higher commissions – a practice known as ‘steering’. The Attorney General also investigated allegations that brokers were engaged in ‘bid rigging’ – that is, soliciting fictitious quotes to make the preferred insurer’s bid looked more competitive. In both cases, insurance brokers were found to have recommended insurance products based on the size of commissions they received from insurers, rather than acting in the best interests of their clients.
ASIC conducted its review to assess brokers’ compliance with their legal obligations, particularly in relation to managing conflicts of interest and disclosing remuneration. ASIC’s review also aimed toidentify the types of remuneration arrangements that exist between brokers and general insurers in Australia and determine whether there was any evidence of the US practices in the Australian industry.
End of release