Marsh & McLennan, the US insurance broker accused of rigging the market to win bogus fees from customers, yesterday warned lines of credit from lenders could be frozen due to legal action launched by the New York attorney general, Eliot Spitzer.
The broker, the largest in the world, said in a filing to the Securities and Exchange Commission that the lawsuit "may prohibit" it from using the $2.76bn (£1.6bn) of credit facilities it has in place.
The company, which has seen its shares halve since last Thursday, added that its banks had agreed to extend loans until the end of the year, but the agreements would have to be renegotiated then. Marsh's banks have also told it that borrowing can only be used to support its commercial paper borrowings. Steven Dreyer, an analyst at Standard & Poor's, said: "The bad news is that it puts restrictions on what Marsh can do with its free cash flow. The good news is the banks have pledged to stick by the company until the end of the year. But beyond that, who knows."
Marsh's woes deepened as insurance regulators from other US states said they would consider taking action against local brokers and insurers over the issues highlighted by Mr Spitzer. They were contingent commissions, paid by insurers to brokers for directing business their way, and putting forward false bids to customers to give the impression of choice when the deal has effectively been stitched up between an insurer and broker.
While commissions are still widely used and seen by many brokers as acceptable, bid rigging is not condoned and, if proved by Mr Spitzer, could lead to Marsh and others being severely reprimanded.
Some critics, however, believe even contingent commissions should be stamped out. A former Lloyd's of London council member yesterday called on UK authorities to launch an investigation into the payment of contingent commissions, saying the practice was "widely employed" in the London market.
Graham McKean, a founder of BMS Group, the London-based insurance broker, and a former member of the Lloyd's council for more than six years, said immediate action was needed to stop the payment of "undesirable commissions".
He said almost all the major insurers in the London market had been strong-armed into paying contingent commissions to brokers, adding that the current plans to eliminate such practices through greater disclosure would not work. He said: "The defence amongst the brokers who do this is that we told the clients we do it, and they don't mind. But Spitzer has said the disclosure to the clients is complete claptrap. They're reporting them as fees and services rendered, which isn't the case."
The Financial Services Authority will take responsibility for regulating the industry in January. It said it would continue allowing brokers to charge commissions without making full disclosure when it takes over regulation of the market in three months.Reuse content