Welcoming the new kid on the block

One of the new concepts that the Retail Distribution Report (RDR) of the Financial Services Board (FSB) has raised as potentially being brought into the short term industry for the first time is the concept of the tied agent.

Up until now the tied agent has been almost the exclusive domain of the long term industry with some very minor exceptions. The short term broker has prided themselves as being independent even though in many cases they only support a small amount of insurers for the majority of their business.

Separate entities

The RDR has proposed that brokers be split into two main categories which will be essentially client agents and product supplier agents where the client can be left with no uncertainty as to who the broker is working for.

The tied agent, which term the RDR has stated maybe confusing and should read product supplier agent, would make it clear to the client that they are the agent of the insurer and would have the insurer logo and branding on their business cards and offices. They would only sell the product of one insurer and they would sit on that Insurer’s FAIS license.

The independent broker would be the agent of the client predominantly but would still be able to have limited binders and functions that they perform for the insurer. They would be closely monitored in terms of conflict of interest provisions given that they will still supply various insurers with business and would be recommending to clients which product is the best for them to buy. This is why the chances of potential conflict is higher in this instance, the insurer is recommending a particular insurer above others for the client and that recommendation should not be tainted by fees and the like that the insurer is paying the broker.

The work of this broker will come under even more scrutiny going forward as the main priority of this broker needs to be the quality of advice being provided to the client.

No more conflict for the broker

With the tied agent or insurer agent, the conflict is far less restricted as only one product is being sold to the client. There is not a situation that an insurer is being supported because of higher fees or mandates being provided to that broker. This will make life easier for the broker in that no further exposure will exist as to why the product supplier was supported and why the one particular product was preferred against another. The client will be advised that only one product is available and the details of the product will be explained.

Potentially less exposure

Exposure may be less and mandates and remuneration may well be less restricted as well depending on where the rules are pegged with respect to tied agents. The insurer will become the FSP responsible for the broker and for the first time the RDR conceded that thought is being given to allowing even juristic entities becoming tied agents and not just individuals, which has always been the case up to now.

All for one

It opens up new options for brokers as the entire brokerage could become the tied agent and not just the individual. While the advantage of independence maybe lost, many more advantages could unfold considering that many insurers have the majority of the products that are most suited for the broker’s needs. Clients may find that if this tied force increases, their current need for the broker to recommend a particular insurer or product over another will disappear.