As more and more Insurance Brokers move away from a commission only based remuneration model to charging client fees, questions arise around obligations in respect of fees.
Principles of equity and indemnity apply to the charging of fees however regulations and the brokers Code also apply.
Providing financial services efficiently, honestly and fairly.
The overarching general obligation for AFSL Licensees to provide financial services to clients ‘efficiently, honestly and fairly’, extends to the systematic practice of charging fees.
The phrase (‘efficiently, honestly and fairly’) has been subject to significant judicial analysis, it is clear that the general obligation of a Licensed insurance broker and their [authorised] representatives means that they must, relevantly:
- perform their functions to a reasonable standard of performance by an insurance broker that the public is entitled to expect;
- a broker must be ethically sound; and
- includes where a licensee pursues its own self-interest and disregards the best interests of its clients .
Conflicts of interests
An AFS Licensee must adequately manage its conflicts of interests. (refer RG 181 Section B)
Insurance brokers have a fiduciary duty to their clients. Subject to any terms governing the fiduciary relationship including Terms of Engagement, a broker will need to act in the client’s best interests, prioritise their interests, not profit without consent, and address any conflicts.
A broker must take this duty into account when complying with its conflicts management obligation. This will also inform the adequacy of their conflict management arrangements. (ASIC RG 181.22)
Best interests obligations
An insurance broker (includes licensees and authorised representatives) providing personal advice to a retail client must act in the best interests of the client.
This duty requires the broker to have:
- identified the objectives, financial situation and needs of the client in respect of the subject matter;
- identified the subject matter of the advice; and
- make reasonable enquiries to obtain complete and accurate information relevant to the client’s circumstances.
This activity should be included in the factors for calculating the fee in addition to arranging the insurance cover, policy administration and claims advocacy.
FSG
AFS Licensees and, independently their authorised representatives, must provide a FSG to a retail client before providing their financial services (i.e. before any advice is provided).
The FSG must be up to date and contain information about the remuneration being received for providing the services.
ASIC INFO 291 is informative
Information about remuneration should be presented in one location and in a way that is easy for the client to understand, consistent with the requirement when a client requests more detailed remuneration information in regulations 7.7.04A(4) and 7.7.07A(4). This could include ranges, rates, comparisons, simple tables and formulas.
Price fixing and Bid rigging
Under the Competition and Consumer Act, cartel activity is illegal. Types of cartel activity include price fixing and bid rigging:
A broking practice must not collude with another unrelated broking pratice(s) in connection with the fees being charged or proposed to be charged.
Price fixing
Competing businesses must not agree to fix, control or maintain the price (or any component of the price, e.g. discounts) they will charge for goods or services.
Bid rigging
Businesses that attempt to interfere with competitive tender processes may be breaking the law. When competitors make agreements about the terms on which they will tender for the right to supply goods or services, they threaten the competitive outcomes that such tenders are designed to create. For this reason, bid rigging, also referred to as collusive tendering, is prohibited
Insurance Brokers Code of Practice
At 3.1 the Code Principles include:
- Professional commitment
- Ethical behaviour
- Transparency and accountability
These obligations extend to the charging of fees, requiring staff and representatives to act honestly and with integrity and transparency in communcations.
6.1 also requires a broker to disclose remuneration to retail clients including any fees payable by the client
Charging Fees – best practice
Brokers should adopt the following practices in connection with charging client fees:
- provide a simple and clear disclosure document to clients that clearly sets out the services to be provided and the fees (or range) to be charged and the factors that may impact the fee (such as type of client and best interests duty, code requirements, arranging cover, policy administration and claims advocacy). The document should have an unambiguous title such as ‘our approach to charging our client’s a fee’ or similar;
- provide documented internal instructions and guidance to staff and authorised representatives on the methodology for calculating fees and the range of fees to be charged based upon complexity and risk-based criteria. The document should also include an internal referral mechanism for proposed fees exceeding the recommended range;
- fee structures and obligations should be included in employment contracts and authorised representative agreements;
- monitoring and supervision (such as client file reviews) covering the fee actually charged to a client based upon the internal document, with clear consequences for breaches;
- training for staff and authorised representatives on regulatory and Code requirements for fees and the licensees approach to calculating and charging fees; and
- consider reportable situation obligations to ASIC where fees charged were excessive.
Disclaimer: Reproduction of statements made in this article by media outlets, whether in full or in part, is strictly prohibited without the written express consent of the author. The views, opinions, and positions expressed within this article are those solely of the author and Compliance Advocacy Solutions Pty Ltd and not the views of other individuals, companies or organisations they may be affiliated with. The author and Compliance Advocacy Solutions Pty Ltd make no representations as to accuracy, completeness, currency, suitability, or validity of any information in this article and will not be liable for any errors or omissions or any loss or damage arising from its use or reliance. This article is intended for educational and informational purposes only and should not be relied upon as professional legal advice.