The Financial Conduct Authority (FCA)'s terms of reference for its wholesale insurance broker market study, published in November 2017, are clear on possible conduct by brokers which the FCA may intervene to regulate. They are much less clear on the dynamics of the market and why intervention should be the favoured route.
In this article, the author, a competition lawyer, examines how a competition authority might approach this market, in particular, by first identifying the relevant markets and market failures that would justify additional regulation.
In reviewing the activities of wholesale insurance brokers, the FCA has a choice of carrying out a market study under its regulatory or its competition powers. It has chosen the former: why?
The FCA has extensive powers under both regimes. An investigation under the regulatory regime, however, is more closely focused on the need for intervention in markets. The FCA also has more discretion to impose market-wide rules and guidance and to apply remedies to specific firms.
Under the competition regime, remedies are also potentially wide-ranging, but are predicated on a finding that competition between firms is insufficient to resolve any market failure. A competition inquiry also requires a more rigorous and economics-based analysis of markets and how they operate, a task ill-suited to regulators such as the FCA who do not routinely carry out such work (in contrast to the CMA).
Moreover, detailed remedies are likely to require a referral to the CMA for a more intensive competition-based market investigation, which would involve the FCA surrendering jurisdiction over one of "its" markets.
It is, therefore, little surprise that the FCA in this case has chosen the regulatory route, so maintaining its control over developments in the wholesale insurance sector.
While the FCA's market study is not competition-based, it cannot assess impacts on consumers without some investigation of the markets in which firms are providing services.
The terms of reference contain a short overview of the London market, but offer little guidance as to what market or markets the FCA will define, beyond a reference to the possibility of competition differing within different "sub-segments" of the overall sector. The terms of reference focus from the outset on certain stakeholders' "concerns that some brokers possess market power which they may be able to use to restrict competition".
This suggests that the FCA will focus on brokers' conduct rather than examining too closely whether the undoubtedly fierce competition between brokers provides a market solution.
Indeed, in principle, a competition authority such as the CMA would normally address concerns about firms' conduct through a fourstage process:
There is little sign that the FCA plans to follow this approach, but it is worth considering how a competition authority acting as such might approach the issues identified in the terms of reference.
As noted above, the terms of reference offer few clues as to how the FCA will approach issues of market definition and competitiveness.
The second and third of its topics, however, set out certain problems it has already identified with how wholesaler brokers act in the market, though it is questionable whether they are in fact two distinct topics:
A concern from a competition law viewpoint is that there is a sense the FCA sees its role as protecting competitors, especially smaller brokers and insurers, rather than protecting the process of competition. The terms of reference do not convincingly identify a market failure such that intervention is necessary.
The FCA has chosen to conduct this market study under its regulatory rather than competition powers, so it might be thought that a competition analysis is immaterial. Principles of good governance and the promotion of competition demand, however, that any regulatory intervention should be based on a clear understanding of the relevant markets and should take place only where essential.
A "remedies first" approach that protects inefficient operators is ultimately not in the interests of the market or consumers. It is therefore to be hoped that, as the market study develops, the FCA pays close attention to the dynamics of the insurance broker sector.
This article was written for Thomson Reuters Accelus Regulatory Intelligence.