On 8 November, the Financial Conduct Authority (FCA) launched a competition market study into the Wholesale Insurance Broker market.
The FCA's stated mission is to "ensure that wholesale markets demonstrate transparency, open access, integrity and competition on the merits". The London insurance market is large and complex with around $91 billion in gross written premium in 2015. If competition in this market is not functioning as it should, this will have a negative impact on the broader economy. In simple terms - if businesses are not getting the most appropriate cover, or if they pay for more risk services than they should, or overpay for those services, that will affect their profitability and so their ability to operate, innovate and grow.
As part of its role as the regulator for the financial services industry, the FCA has the power to enforce UK competition law, including by conducting market studies, which look at how competition is working in a particular market and assess whether it could work more effectively.
The FCA has published its Terms of Reference document setting out its initial thinking and the specific topics it plans to investigate including:
Market power - do any individual broker firms have significant market power and, if so, what effect does this have on competition?
Conflicts of Interest - conflicts of interest may arise if, for example, a broker chooses an insurer or product for a client on the basis of the remuneration the broker will receive, rather than what is in the client's best interests
Broker conduct - is there evidence of collusion or coordination between broker firms and do any broker practices lead to a reduction in competition, for example, when risks are placed through facilities rather than in the open market, does this exclude certain types of insurers?
The market study will involve the FCA taking an in-depth look at how businesses and clients operate. First the FCA will undertake an extensive information gathering exercise, which will inform the FCA's assessment of the market. At the end of the market study, the FCA will produce a detailed final report which will set out any remedies to be imposed.
The FCA has wide-ranging powers to impose any remedies it considers necessary to address any competition problems identified, and these can have a significant impact on the affected businesses. For example, the outcome of a competition market study into payment protection insurance (separate to the mis-selling investigation) was a ban on the sale of PPI at the point of sale of the underlying credit product. This had a major impact on many financial services businesses and some ceased to be viable as a result.
A further possible outcome is that if the FCA uncovers any conduct it suspects is an unlawful breach of competition law, for example, if it finds evidence of collusion, it may bring enforcement action against the businesses concerned which would mean an investigation and possible fine.
Businesses which may be directly or indirectly affected by the FCA's market study into the wholesale insurance broker market have the opportunity now to provide input and so influence both the scope of the market study and the FCA's emerging thinking. The FCA's Terms of Reference are open for comments until 19 January 2018 and the FCA has listed a number of questions on which views are invited. The FCA will also send market players questionnaires as part of its information gathering exercise.