To: CEOs, Active Underwriters, Directors of Underwriting, Compliance Officers and in-house counsel

Broker Remuneration Advice

Following Lloyd's circular of 11 April and our circular of 1 December which we recently re-circulated, we are obtaining legal advice from Reynolds Porter Chamberlain LLP on the subject of broker remuneration.  We will circulate the full legal advice shortly, but in the meantime RPC have identified the following key issues, which they have emphasised are at this stage set out in brief summary form:

  • It is necessary to consider each broker proposal on its own terms.  The acceptability of any proposal will depend on the precise nature of the broker's relationship with the insurer and with its clients, and the precise legal agreements being proposed.

  • Where a broker is holding itself out as providing a fair analysis of the market (ICOBS 4.1.6) its selection of insurers must be based on product features, premiums and services offered to customers and not solely on the benefit offered to the broker (ICOBS 4.1.8(3)).  If a broker gives preference to insurers willing to pay additional fees to that broker, the broker is likely to be in breach of the FSA Rules and its duty to its client.  The paying insurer is then likely to be in breach of the FSA Rules as it will be paying an inducement which would conflict with the broker's duties to its customers (ICOBS 2.3.1).

  • Where the broker is remunerated by commission, the customer is deemed to agree that the broker may receive and retain such commissions as are usual and customary.  There is no automatic obligation for the broker to notify the customer of the amount of commission but under FSA Rules the broker must disclose the amount of commission (in cash terms) on request.  Any benefit in connection with the broker's arrangement of the policy is treated as commission and must be included in the broker's disclosure to its customer.

  • Where the broker is remunerated by fee, the customer is entitled to assume that the broker is not receiving any other payment for the same services.  Any profit received by the broker from an insurer without the knowledge or consent of the customer is a secret commission for which both the broker and the insurer as payer are accountable to the customer.

  • If the insurer is making a payment to the broker, this may in some circumstances have the effect of making the broker the insurer's agent.  In that case, the broker would be acting as agent for both the insurer and the policyholder giving rise to a conflict of interest.  Moreover if the broker were the insurer's agent this has significant implications for duty of disclosure, because the broker's knowledge would then be imputed to the insurer.

  • The FSA Rules (SYSC 13.9) impose detailed requirements relating to outsourcing, which is defined as when a person is providing customised services to the insurer.  In any event, if the services being provided cannot be defined with sufficient precision to enable them to be audited (and to enable an arbitrator or other tribunal to know whether or not they have been provided satisfactorily), this inevitably raises the question whether an outsource agreement would be genuine. 

  • Section 1 of the Bribery Act 2010 (in force 1 July 2011) makes it an offence to make a payment to induce a person who is expected to perform its duty impartially, to perform that function improperly.  Therefore, payments by insurers to brokers to induce introduction of business improperly may constitute a criminal offence; in that case, the premium monies would be proceeds of crime with consequential money laundering implications.

  • Further, section 7 of the Bribery Act creates a new offence of failing to prevent an associated person paying bribes.  An associated person is defined as a person who performs services for or on behalf of an organisation.  Sections 7 and 8 of the Bribery Act have been widely drafted, so it would be prudent for insurers to proceed on the basis that any brokers may be treated as 'associated persons', requiring the insurer to have adequate procedures to prevent the broker from paying bribes to obtain or retain business.

  • Where either policies are governed by non-UK law or policyholders are domiciled outside the UK, then the applicability of broker conduct must be tested not only by reference to English law (as set out above) but also by reference to the relevant local law.

We aim to circulate a fuller legal opinion from RPC early next month.

Yours sincerely


Kees van der Klugt
Head of Legal and Compliance

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LMA Bulletin

Date:  20 April 2011

From: Head of Legal & Compliance

Ref: LTM11-013-KK

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