The Broker's Conflict: Commission Disclosure and Suitability
A broker, Harlow Insurance Services, advises a family-owned manufacturing business on its commercial combined policy. The broker recommends a policy from Insurer A that pays a 28% commission, while a comparable policy from Insurer B pays 15% and has a slightly broader wording including business interruption with a 24-month indemnity period. The client's turnover is £6m and it has significant machinery exposure. The broker's file contains no recorded comparison of the two options and no documented reason for recommending A. The client later discovers the commission difference and complains that it was not told. The broker says commission disclosure is not required because it is 'industry standard'.
1. Assess the broker's conduct against the ethical and regulatory standards for insurance intermediaries.
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The broker's position is weak on several grounds:
- Conflicts of interest. A 28% versus 15% commission creates a financial incentive to recommend A. The broker must identify and manage that conflict; simply asserting it is 'industry standard' is not a defence.
- Disclosure. Under IDD (Insurance Distribution Directive) and FCA rules, the intermediary must disclose remuneration - including commission - in a clear and fair way before the contract is concluded, and must inform the client of the nature of the remuneration where it could conflict. Saying disclosure is unnecessary is incorrect.
- Suitability and best interests. The broker must act in the client's best interests and recommend a suitable product. A broader BI wording with a 24-month indemnity period may be materially better for a manufacturer with machinery exposure; the broker's file shows no comparison and no rationale, which is a documentation failure and suggests the recommendation was not objectively justified.
- Record-keeping. The file should evidence the demands-and-needs analysis, the options considered, and the reasons for the recommendation.
Conclusion: The broker has likely breached its conflict-of-interest, disclosure and suitability obligations. The complaint should be upheld in part; the broker should review the recommendation and consider remediation (e.g. re-broking at the client's option, or redress for any detriment).
2. If the client had suffered an uninsured BI loss because the 24-month indemnity period was needed, what redress might be appropriate?
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Where a broker's unsuitable advice causes loss, redress is usually compensatory - to put the client in the position it would have been in had the advice been suitable.
- Identify the loss. If the client's BI loss extended beyond the 12-month indemnity period actually purchased, the uninsured element (the portion of loss that would have been covered under the 24-month wording) is the measure of detriment.
- Causation. The client must show it would have bought the broader policy had it been properly advised. Evidence: the client's stated needs, the broker's file, and the fact that a comparable option existed.
- Quantum. Calculate the difference between the cover actually provided and the cover that should have been provided, applying the policy terms (indemnity period, limits, deductibles).
- Redress options: the broker (or its professional indemnity insurer) may pay the shortfall, or arrange retrospective cover if available. Interest and any consequential costs may be added.
- Process. The client should complain first; if unresolved, refer to the Financial Ombudsman Service (if eligible) or pursue a professional negligence claim. The broker should also notify its PI insurer promptly.
Outcome: The broker should quantify the shortfall, offer redress, and remediate its advice process.