A key area in terms of managing conduct risk and delivering good customer outcomes is ensuring that none of the business arrangements of the firm conflict with the interests of the customer and where conflicts do exist that cannot be managed or mitigated sufficiently that the firm is transparent with the customer regarding these.
Managing conflicts of interest is specifically covered by Principle 8: ‘A firm must manage conflicts of interest fairly, both between itself and its customers and between one customer and another’, and also by Principle 12: ‘A firm must act to deliver good outcomes for retail customers’.
Conflicts can arise in a number of areas but the most obvious is where a firm’s financial arrangements could influence the advice or recommendations made to customers – either where this relates to rates of commission or remuneration of staff.
Conflicts can also arise where firms act on behalf of the customer and the insurer – for example, where a firm has a claims handling authority which may be linked to a profit share on the performance of an account. Conflicts may also occur where a firm is acting for both parties in a claim.
How this may affect you
Any conflicts must be managed in order to ensure that customers are protected. We recommend that firms begin by reviewing their business to determine what, if any, conflicts may exist. Where potential conflicts are identified, these should be reviewed, and a process put in place to avoid any customer detriment. The review process and any procedures put in place should be formally recorded in a Conflicts of Interest Policy (see CORE13 in Chapter A).
It is unlikely for an intermediary to not have any conflicts of interest; remember, a conflict of interest still exists even if it is well managed. Where a firm identifies no potential conflicts, we recommend a best practice of conducting an annual review to monitor whether any conflicts have arisen or are likely to arise.
It is up to each individual firm to determine how best it may address any conflicts identified. The following suggestions, though, may prove helpful.
Moving blocks of business
Where a firm moves an account from one provider to another on the basis of increased commission, the firm should consider how such a move is justified as being in the customers’, as well as the firm’s, best interests. For example, where a customer may have been with a particular insurer for a while, why would it be in their interest to change provider where there is no benefit to them in terms of better service or improved cover?
It is not necessarily sufficient for a firm to be able to evidence that the customer is ‘no worse off’ when an account is moved in this way, if such a move affects continuity without delivering demonstrable benefits. Of course, if the new provider offers better service or better cover or has a better record of meeting claims, then this would be suitable evidence to demonstrate that the interests of the customer have been given at least equal weight when making a business decision which delivers benefits to the firm. Firms should also have in place an adequate process to explain the change of provider to the customer.
Delegated claims authorities
Where the firm has a delegated claims authority which is linked to a profit share, it may be possible to establish an information barrier within the firm, so that those who may affect decisions about the insurers with whom business is placed (such as advisers) are not privy to information which may influence those decisions. For example, the firm should take steps to ensure that the individual assessing the claim has no involvement in, or knowledge of, the account’s performance. This practice is described by the FCA as a ‘Chinese wall’. Information about Chinese walls is given in Section A.18.3.
Firms should also consider monitoring claims settlements to ensure there is no indication claims are being unfairly settled.
Volume override / contingent commissions and profit share arrangements
Where a firm receives incentives from insurers in the form of volume override commissions (i.e., remuneration based on the volume of business placed), enhanced commission rates for delivering outcomes favourable to the insurer, or profit share arrangements, the firm should consider the implications of advisers being aware of such arrangements or any pressures being applied in terms of meeting targets.
Such business arrangements are commonplace in the market and are not necessarily intrinsically unfair to the customer, provided the firm takes steps to address any possible implications from a customer outcomes perspective.
Options to manage the risk of any detriment to customers include:
- where possible, avoiding advisers being aware of such arrangements;
- where it is not possible to prevent advisers being aware of such arrangements, consider ensuring that individuals are not aware of the actual performance of the account concerned;
- increased file checks and monitoring of claims and complaints MI to check advice is appropriate and that claims rejected and complaints received are at expected levels.
Firms should record such arrangements with insurers, and record the processes put in place to monitor and address any risks to the customer. Firms should also ensure that appropriate MI is available to measure that conflicts are being appropriately managed.
Because a firm can generate income from premium finance arrangements, there is clearly an incentive for it to promote this service to customers. Whilst offering premium finance is, of course, not in itself a conflict of interest, we consider it best practice for firms to ensure a customer is not over-encouraged to pay by instalments and that there is no insistence the customer uses only the premium finance arrangements provided by the firm.
Where a firm offers premium finance, we therefore recommend that staff state the total annual premium first and then advise the customer that the firm is able to offer an arrangement to spread the cost of the payment if the customer requires this facility. A customer is then free to choose whether to pay in a lump sum or to use the firm’s facilities. This is required by the Rules in ICOBS 6A.5.
If a customer wishes to pay by instalments, it should also be made clear that the firm offers this arrangement but that the customer has other options e.g., customer may choose to pay by credit card or seek alternative funding.
Firms which offer premium finance arrangements should record the business’s approach to offering finance as part of the firm’s sales processes, ensure staff are trained in the process and monitor compliance through sales observations and file checks. Firms should also consider setting an appropriate penetration level for each class of business and monitor take up to identify if these levels are exceeded as exceeding expected levels might be indicative of an adviser failing to follow the firm’s procedures and perhaps of over-selling the facility. In relation to the overall end ‘fair value’ of the insurance arrangements to the customer, firms must be able to demonstrate that any interest rate overrider that the firm receives represents fair value to the customer.
Where staff are incentivised by targets, it would be best practice, where possible, to remove from the system the commission rates applying to particular policies and to increase file checks where advisers are approaching targets. Firms should also consider taking into account issues such as claims rejected, complaints data, customer feedback and T&C monitoring, in order to reduce the risk that incentives may have a detrimental effect upon the suitability of advice and the integrity of the sales process.
Again, firms should record remuneration arrangements and note the processes put in place to monitor and address any customer detriment. Firms should also ensure that appropriate MI is available with which to measure that conflicts are being appropriately managed.