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FCA announces market study into wholesale insurance brokers

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14/11/2017

Background

The Financial Conduct Authority (FCA) announced its intention to launch a market study into the wholesale insurance broker sector in its Business Plan for 2017/18. On 8 November 2017, the FCA published its Terms of Reference regarding this market study. A link to the Terms of Reference can be found here.

The FCA proposes to take a closer look at how competition works in the wholesale insurance broker sector and the influence of brokers on other parts of the sector.

The FCA uses market studies, either under the Financial and Services Market Act 2000 (FSMA) or the Enterprise Act 2002 (EA), as an important tool for examining how well competition works in financial markets and assessing where it should intervene in the interests of consumers. The FCA is conducting this market study under its powers under FSMA, rather than its concurrent competition powers under the EA.

The key areas of the market study

For the purposes of this market study, the FCA is defining wholesale insurance broadly. The FCA intends to cover wholesale and reinsurance for large, complex or specialist risks placed by brokers in the London insurance market, with a focus on large corporate clients based both in the UK and overseas.

The FCA plans to focus on three key areas to determine how competition is working within the sector:

  • Market power: The FCA will consider whether individual broker firms have market power and if so what impact this has on competition (for example, because brokers are using market power to seek enhanced commissions). The FCA will consider a broker firm to have market power if it has the ability to raise prices of its services beyond normal competitive levels. The FCA also plans to look at pricing, margins, switching costs and barriers to entry including whether a broker’s specific expertise and access to information can give it a competitive advantage and whether broking firms are taking advantage of economies of scale and scope and are making it difficult for smaller brokers to expand.
  • Conflicts of interest: The FCA will assess conflicts of interests in the sector, and the extent to which conflicts of interest may impact customer outcomes. In particular, the FCA is concerned that there may be potential conflicts of interest and that brokers are incentivised to choose insurers for their clients which provide the broker with a greater remuneration instead of the most appropriate insurer for the client.
  • Broker conduct: The FCA will examine how certain broker practices can have an impact on competition in the industry. In particular, how certain activities may exclude some insurers (for example, by placing risks through facilities rather than in the open market) or dampen competition between brokers through “tacit” coordination (i.e. an implicit understanding rather than a formal agreement).

Potential outcomes

If, as a result of the market study, the FCA concludes that competition is not working well, it has a wide-reaching powers to intervene. These powers include:

  • Making regulatory changes;
  • Rule-making, including changes to or potential withdrawal of existing rules;
  • Using firm-specific enforcement powers;
  • Publishing guidance or making proposals for enhanced self-regulation; or
  • Making a “market investigation” reference to the Competition and Markets Authority. The FCA is not afraid of taking this step. For example, on 14 September 2017, the FCA made a market investigation reference for investment consultancy services following its asset management market study.

Next steps

The FCA is not formally consulting on the Terms of Reference. However, it has stated that it would welcome any feedback on the topics it plans to explore by 19 January 2018.

The FCA aims to publish an interim report in autumn 2018, which will identify any preliminary conclusions and consider possible remedies (if it considers these are necessary).

An opportunity for industry participants to engage

The next step following the formal launch of a market study will be for the FCA to gather information from a broad set of stakeholders such as insurers, brokers and purchasers of insurance policies. The FCA will expect firms to provide it with information on a voluntary basis, but it also has powers with which it can formally gather information under FSMA (and the EA).

A market study represents an opportunity to influence future regulation and the shape of an industry. It also provides a way to raise any concerns which smaller firms may have as regards their ability to compete and grow in the market.

We expect industry participants (including brokers and insurers) to receive detailed requests for information and invitations to roundtable sessions with the FCA in the next few months.

The Competition Team at Walker Morris has extensive experience of advising on FCA market studies. If you would like further information on how Walker Morris may be able to assist you, please contact a member of the team listed below.

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