The move makes the gulf between general insurance, where there is little protection, and investments, where regulation is tight, all the greater. An independent financial adviser selling a life assurance policy - confusingly, often referred to as insurance - is bound by codes of practice, a duty to disclose his or her commission, and tough conditions for the firm's solvency. A next door insurance shop, selling a household policy branded by the same insurer, will have no statutory obligations. His or her client will have little more than the protection of common law.
The Government's move is partially because it does not want the confusion of regulatory bodies outside the new Financial Services Authority. It is also because the existing system, which has operated for over 20 years, is less than effective.
Since 1977, companies that want to use the term "insurance broker" have had to register with the IBRC. However, there is nothing to stop unregistered firms from selling insurance policies, as long as they call themselves something else, such as an insurance agent consultant, and they can obtain a contract with an insurance company. If a customer has a complaint against a registered broker, the broker can be disciplined and, ultimately, struck off. There is no such protection for clients of unregistered firms.
The insurance brokers' professional bodies, the Institute of Insurance Brokers and the British Insurance and Investment Brokers' Association, had, along with Lloyds of London, actually been pressing for tighter regulation. "We are sad that even that minimum degree of protection is being removed," explains Mike Williams, chief executive of BIIBA. "We would much have preferred to see stronger protection in place."
Instead, the Government wants to see greater self-regulation by the insurance industry, including intermediaries. This will, though, be a voluntary process. It will be up to consumers to check whether someone selling insurance is a member of a professional body, before they part with their cash.
The dangers of dealing with an unregistered insurance agent are illustrated by the experience of Peter Walker. Mr Walker, who runs a public relations company in London, insured his car with a high street agent. The company had been trading for many years, and Mr Walker was a standing customer.
Mr Walker had an accident last year, and following that his agent renewed his car insurance with a different firm. Problems with the claim from the first policy aroused Mr Walker's concerns, and he contacted the insurers - Royal Sun Alliance - for a copy of his policy documents. He had not received copies from the agent.
To his surprise, he found that he had paid pounds 1,000 more to the agent than the policy actually cost: pounds 1,770 instead of pounds 770. He has since discovered that the agent has ceased trading, and his chances of recovering the extra money appears slim.
Mr Walker concedes that it never occurred to him to check the status of the agent, which had also organised insurance for his business for many years. "I am horrified at how naive I have been," he admits. "But no matter how sophisticated you are, you become so familiar with your suppliers."
Mr Walker fell victim to a practice known in the trade as "grossing up" which insurance bodies admit, does happen from time to time. The practice is unethical and often, illegal, and is condemned by the brokers' organisations. Insurance agents should show the commission they earn on a policy to clients if asked but, unlike for investments, there is no legal obligation for them to do so.
Insurance companies also condemn the practice, but they admit that they cannot police every intermediary. When an insurance agent asks to sell policies for an insurance company, the company makes them sign a contract. This contract sets out the commission they will receive, how long they have to pay the insurer, and that they must give "best advice" to their clients. Grossing up is not part of best advice, and insurance companies will stop trading with agents that they find overcharging.
"We pay a commission of 12.5 per cent of premiums," points out Michael Wallwork, communications manager for Royal and Sun Alliance's broker division. "We would take a very dim view of any agent who tries to further enhance that. It is not best advice."
The Government now plans to work with insurance bodies, including BIIBA and the Association of British Insurers, to create a stronger set of rules covering member firms. Part of the new code will be bonding for insurance agents. Firms will have to take out insurance to guarantee that their clients' premiums will be paid if the business runs into difficulties, in much the same way as travel agents now do.
Meanwhile, there are steps anyone can take for reassurance when dealing with an insurance agent - the vast majority of whom are honest. The first is to check that the firm is a member of one of the professional bodies, the second is that they are an authorised agent for the insurance they are offering.
At Royal and Sun Alliance, Michael Wallwork advises customers to note when their insurance documents arrive. This now takes two weeks or less; any more, and there are grounds for asking questions. Also ask for a written receipt from the insurance agent for the premium and for a receipt from the insurer itself. If there is any doubt the insurer will provide a receipt directly. This should match the premium the agent charged, as it already included the commission.
Readers can check the status of insurance agents with BIIBA on 0171 623 9043 or IIB on 01933 410003. For now, they can check registered brokers with IBRC on 0171 621 1061.Reuse content