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Tips & Traps: Commissions and Conflicts
Broker commissions are a ready source of potential conflicts of interest. In most cases, however, the conflict can be managed by disclosing it to the customer. Let’s look at a few of situations and how to manage them.
Variable Commission Rates – Brokers often receive commission at different rates from different insurers. A potential conflict arises because it may not always be in the client’s best interest to insure with the insurer who pays the highest rate You can manage this by only placing the business with the insurer who pays the higher commission if it is appropriate cover for the client. Also tell the client why you recommend one insurer over another and if you will receive a higher commission from the insurer you have recommended, than you would have received from the other insurers you considered.
Profit Share or Bonus – Many brokers receive a bonus or profit share for placing a certain volume of business with an insurer. A potential conflict arises because it is in your interest to place the business with that insurer. You can manage this by only placing the business with the insurer if it is appropriate cover for the client and by telling the client about the type of profit share or bonus that you receive.
Premium Funding Commissions – Most brokers receive a commission from the funder when arranging premium funding. Sometimes the premium funder is related to the broker. A potential conflict arises because it is in your financial interest to arrange the premium funding – even more so if the premium funder is a related company.
You can manage this by not insisting that the client use any particular premium funder and allowing clients to arrange their own premium funding if they wish to do so. If you do arrange the funding, then disclose the remuneration that you receive to the client.
While you can use your FSG to disclose information about your conflicts in general terms to retail clients, you still need to tell clients about any conflict that affects their individual situation. Ideally this should occur before you place the insurance or the premium funding as part of your SoA or, if no SoA is required, when you provide retail clients with information about your remunerations and the associations / relationships which have influenced your advice.
Remember that the conflicts of interest requirements apply to wholesale as well as retail clients.
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