pkf littlejohn llp broking business for insurance brokers the … · 2015-12-01 · insurance...

1 | broking business | November 2015

broking business November 2015

PKF Littlejohn LLP

The newsletter for insurance brokers

and MGAs

Outsourcing in the general insurance marketWhat this means for firms following the results of the FCA thematic review

Taxing dividendsThe impact for owner-managed insurance brokers

A perfect matchWhat makes a broker an attractive proposition to private equity?

INSURANCE

broking business | November 2015 | 3

Insurance Act 2015The Insurance Act 2015 received Royal Assent in February 2015 and came into force on 12 August. The new act seeks to clarify the law in a number of areas including:

• Pre-contractual duty of disclosure (duty of fair presentation)

• Warranties and other policy terms (such as ‘basis of contract’ clauses)

• Fraudulent claims (insurers will have the option of terminating a policy from the date of the fraudulent act, as opposed to the date of discovery).

Firms need to review and understand the legislation in order to determine the impact on their processes and operations; this will include ensuring staff are aware of the impact the new legislation will have on their day-to-day roles and responsibilities.

Clients’ money Still no news from the FCA in relation to its proposed new clients’ money rules. Given the delays, it isn’t certain that the next step will be the publication of a policy document. There’s the potential that we may see a new consultation paper setting out a revised approach. The outcome remains to be seen, but hopefully there will be some news before the end of the year to provide firms with clarity and allow them to plan accordingly.

We seem to be in a phase of continuous change that insurance intermediary managers need to adapt to – there’s no more ‘business as usual’. This makes life interesting but also puts more pressure on firms to keep abreast of those changes. There have been a few surprises recently, notably the changes in the budget and also delays in the case of the new client money rules.

In this edition of our newsletter we’ve compiled a variety of topics that our clients have been tackling. In particular, the results of the Financial Conduct Authority’s thematic review on delegated underwriting, which has proved to be a real challenge to the market. The report was fairly critical of the way delegated underwriting relationships are handled and we believe there is a lot of work to be done in building systems and processes that allow better monitoring and communication across the distribution chain. This won’t be a quick process as some of the answers can only be addressed at a market-wide level. Nonetheless firms can start to ensure they address the issues raised in an appropriate way which should ultimately lead to better service and, hopefully, happier customers.

We hope that our articles help provide a little more insight into some of the issues you’re facing at the moment and, as ever, please do get in contact should you need any further assistance.

welcome to broking business

broking business

authority and ensure that sufficient controls are in place to manage relationships. See page 4 for further details.

Premium finance The FCA expects all firms to consider the findings of its thematic review of premium finance that it published in May 2015. Its approach to this review followed the ‘online purchasing journey’ of customers up to the point where payment details were requested, and considered how firms were meeting their obligations as set out in the ICOBS, PRIN and CONC, together with the Consumer Credit Act 1974, where the premium finance involved a credit agreement.

The findings indicate that insurers and intermediaries don’t always “provide clear and easily understandable information about the overall cost of paying insurance, meaning that consumers can struggle to compare the difference between paying upfront and by instalments”1.

Coverholder reporting standardsLloyd’s published an updated version of its Coverholder Reporting Standards in July 2015. A number of the changes are designed to ensure that underwriters receive the data necessary to enable them to meet the Solvency II reporting requirements which go live in 2016. Lloyd’s has included premium and claims reporting templates on its website; copies can be found at www.lloyds.com /coverholderreportingstandards. Although the templates provide a good reference point to ensure firms include the required information, their use is not compulsory.

BIBA code of conductThe British Insurance Brokers’ Association (BIBA) launched its voluntary Code of Conduct at its Annual Conference in May and has begun discussions with the Insurance Brokers’ Standards Council with a view

to achieving a single Voluntary Code of Conduct and guidance. Press reports indicate that the FCA welcomes the Code which echoes its own ‘Principals for Business’.

John NeedhamPartner, Head of Broking

Email: [email protected]: +44 (0)20 7516 2284

broking business

news

1 Source – FCA press release 11 May 2015


John Perry John is a partner with experience of broking, life and general insurance and reinsurance, spanning both domestic and multinational operations.

What will the budget mean for insurance intermediaries?At first glance, the summer budget came across as good news. However, several announcements will impact the insurance sector:

• Insurance Premium Tax (IPT) – from 1 November 2015, the standard rate of IPT will be increased from 6% to 9.5%

• Taxation of dividends – from April 2016, a higher rate tax payer with dividend income will pay 32.5% Income Tax, as opposed to the current effective rate of 25%. Those who have income over £150,000 will pay 38.1% as opposed to the current effective rate of 30.1%

• Business acquisition – companies were able to claim tax relief for the cost of purchased goodwill and certain customer related intangible assets. This has been scrapped with effect from 8 July 2015.

For further details visit our website at: http://www.pkf-littlejohn.com/media/documents/Insurance_Intermediaries_Budget_guide.pdf

Delegated authoritiesThe Financial Conduct Authority’s (FCA’s) thematic review of the use, oversight and governance of delegated authority arrangements was published in June. Based on its findings, firms should carefully consider the framework within which they delegate underwriting


broking business | November 2015 | 5

outsourcing in the general insurance market

In June this year, the Financial Conduct Authority (FCA) published the results of its thematic review of delegated authority arrangements in the general insurance market (TR15/7). It focused on concerns over firms’ oversight of these arrangements and the potential impacts any shortcomings could have upon the delivery of products and related services to customers. The FCA’s concerns are consistent with those set out in its ‘Responsibilities of Providers and Distributors for the Fair Treatment of Customers’ (RPPD) where it states: “a customer’s experience should not be affected by whether a product or service is provided and distributed by a single institution or by two or more institutions”.

The FCA is encouraging two important shifts in thinking with regard to the delegated authority business model:

• To consider delegated authority as an outsourcing arrangement which is underpinned by a governance and control framework expected of any outsourcing arrangement

• To focus on customer outcomes by all parties and across all stages in the insurance product life cycle. This continued focus on customer outcomes is consistent with the ‘conduct risk agenda’ that we’ve seen being rolled out across the insurance market recently.

Their findingsThe FCA found that many of the firms reviewed, both insurers and intermediaries, didn’t appear to have adequately considered or recognised their regulatory obligations in relation to delegated authority arrangements

and the functions they performed, and the roles they carried out in the context of these arrangements. In addition, it found insufficient consideration had been given by all parties to the interests and fair treatment of customers and how this might be impacted by these arrangements.

Although many of the review’s findings target insurers’ management and oversight of delegated authority arrangements, they also have significant implications for intermediaries:

Impact assessmentIntermediaries should assess how they’re impacted by the TR15/7 findings. This should be informed by, for example, an analysis of the type and/or nature of delegated authority arrangements they are involved in, whether they have product provider as well as distributor responsibilities, whether they have any sub delegation, etc.

Reassessment of risk appetite and approach Insurers will be reviewing and potentially rearticulating their risk appetite and approach to delegated authority. This may lead to insurers that intermediaries do business with, having a higher or lower risk appetite and this will affect the way they do business with them. In a worst case scenario, insurers may not wish to renew certain delegated authority arrangements.

As part of the setting of risk appetite, insurers and intermediaries will need to establish and agree on what good customer outcomes look like for delegated authority business and how these can be measured.

Enhanced due diligence processInsurers will be enhancing their due diligence process (of both products and intermediaries) and they’ll be raising the bar as to the level and type of information they’ll want to see from intermediaries at the due diligence stage (particularly where the intermediary is both product provider as well as distributor). If intermediaries want to secure their existing and new relationships with insurers, they’ll want to get their house in order to demonstrate that they are within the insurers risk appetite and can meet the due diligence requirements. In particular, the due diligence process upon renewal is likely to be more onerous than previously.

Redefinition of contractual termsInsurers may wish to redefine their contract terms with intermediaries, for example, to clarify the roles and responsibilities of the various parties in the distribution chain, and any new Management Information (MI) and reporting requirements, in order to facilitate effective monitoring and oversight across the distribution chain. Intermediaries will need to engage with insurers to understand what this means in practice for their business and the impact in terms of resourcing and systems. Furthermore, TR15/7 highlights the risks associated with delegated authority arrangements where the intermediary has claim-handling responsibilities and is remunerated via profit commissions. Insurers are therefore likely to be reviewing these arrangements and understanding how these risks are managed.

Intermediary product provider responsibilitiesWhere intermediaries are the product provider as well as distributor, they’ll need to ensure that they fully understand their responsibilities to customers and the associated monitoring and oversight. In the work we’ve done in this area, we’ve found that customer outcomes have been at the core of product design and development processes. However, the documentation of these considerations and conclusions has been weak. This will need to improve in order to demonstrate to insurers (and the FCA) that due consideration has taken place.

Oversight and monitoringInsurer oversight and monitoring of delegated authority arrangements is expected to increase in response to TR15/7, particularly in the area of claims and complaint handling where customer outcomes are key. This could lead to:

• Insurers rolling out their own claims and complaint handling processes and control frameworks across the distribution chain

• Increased audit focus on claims and complaint handling processes

• Implementation of claims and complaint handling service standards and KPIs

• Enhanced MI sharing and reporting requirements (including more focus on customer outcomes across the product life cycle and more face-to-face engagement).

These changes are likely to raise some challenges for intermediaries. In particular, they’ll need to assess their systems for capturing and reporting on any new data and/or MI requirements; the frequency and methods of reporting to insurers (including any linkage with their systems); and any issues arising from sharing customer or business-sensitive information across the distribution chain. Insurers and intermediaries will need to establish protocols to work together to analyse, act and respond to new data/MI.

This may require significant investment in resources and systems and the market as a whole will need to work out who bears these costs or whether they get passed onto customers (which is unlikely to be the customer outcome that the FCA intended).

AuditsInsurers may implement more focused audits of intermediaries and this is good news. Intermediaries may further be able to help themselves by engaging with insurers to understand audit scope, particularly with regard to matters of conduct and ensuring that they can provide sufficient and appropriate information for the audit. There may also be more structure around the follow up of audit findings which will lead to more responsibility and accountability, so intermediaries should be prepared for this. Furthermore, the TR15/7 findings with regard to audits will need to be adopted by intermediaries who sub delegate.

Key challengeIt would seem that the key challenge is the need for more effective communication and co-ordination across the distribution chain. If not done well, there will be gaps (leading to poor customer outcomes) or overlaps (leading to confusion and inefficiencies in the market as a whole). It’s therefore important that everyone in the distribution chain accepts TR15/7 in order to make it work.

More details can be found at www.fca.org.uk/static/fca/documents/thematic-reviews/tr15-07.pdf. However, if you wish to understand more about how TR15/7 could affect your business, please contact a member of our broking team.

broking business broking business


Jessica Wills Jessica is a senior internal audit specialist with a wealth of knowledge of the insurance industry. Her experience has covered a wide range of firms, including insurance brokers, Lloyd’s syndicates and insurance companies.


broking business | November 2015 | 76 | broking business | November 2015

taxing dividendsOne of the most surprising announcements in the July Budget was the change in the basis of taxation for dividends received by UK residents.

This is likely to significantly impact owner-managed insurance brokers, who typically take profits from their business by way of a dividend.

Why such a surprise?Arguably the greatest reason that the changes have come as such a shock is that they were not mentioned in the run up to the election. There were, however, specific promises, e.g. the ‘Triple Lock’, to legislate that the Government would not apply increases to the rates of Income Tax. However, this does not extend to where the government wishes to correct imbalances.

Although not all recipients of dividends will pay more tax due to the intricacies of the new rules, make no mistake – these are new, higher rates of tax for dividend income.

ISSUES THAT MAY AFFECT YOUR DECISION

• Ifyouwanttomakeasignificantpersonalpensioncontribution– astaxreliefcanonlybegenerated when you’ve ‘earnedincome’i.e.salaryagainstwhichtosetoffthecontributions.

• If you’re planning on selling thebusiness–solongasyoudon’thavetoomuchretainedcashinthebusiness,keepingtheprofitsinthebusinessmayenhanceyoursalepricewhichwillcarrya10%rateoftaxifEntrepreneurs’Reliefisinpoint.

• If you’ve other shareholders who aren’t employed in the business–astheywillneedto see a dividend as part of their investment and your dividend entitlement will follow automatically.

What’s the imbalance caused by the current rules?There are three variables that affect the decision as to whether it’s more tax efficient to take profit from a company by way of dividend or salary – the rates of Corporation Tax, Income Tax, and National Insurance. Fundamentally, salaries give rise to National Insurance liabilities, but are generally allowable to reduce the Corporation Tax bill for the company. How these rates balance out for a particular company and the recipient would determine on a year-by-year basis which route was more efficient, often giving different results in two consecutive years.

Although Income Tax rates on both salaries and dividends have been stable in recent years, the rate of Corporation Tax has fallen at a more rapid pace than the increases in National Insurance rates. This has meant that it has nearly always been more tax efficient overall to take dividends rather than salary, and most company owners have done so.

In addition, the significant savings from dividends have led to a push

to remunerate employees by way of dividends, sometimes using complex share structures. The changes are likely to significantly reduce interest in these schemes in future.

OK, what are the changes?The key aspect of the changes is that from 6 April 2016, dividends will no longer be received with a notional tax credit of 10%. Under the current rules, an individual who receives a cash dividend of £90 will be deemed to have received a gross amount of £100 with Income Tax deducted of £10. When the dividend is reported in their tax return, it’s taxed at a rate of either 10%, 32.5% or 37.5% (dependent on their total income level), but the tax deemed to have been paid is then subtracted from their final tax bill. This gives effective rates of tax payable on the cash received of 0%, 25% or 30.6%.

From 6 April 2016, the notional tax credit will no longer exist, and the rates of tax applied to dividends will change to 7.5%, 32.5% and 38.1%. How this compares year-on-year is illustrated in the table on the following page.

At all levels of income, the rate of tax paid on the same dividend after the 5 April 2016 increases by £7.50. However, this is subject to one concession – all taxpayers receive a new annual dividend exemption for the first £5,000 of dividends received per year, which gives some protection.

So, I can only draw salaries now?Not exactly; what the changes do is add confusion to the mix. Whereas in the current year, dividends will nearly always be preferable from a pure tax

efficiency perspective, from 2016 the circumstances will vary on a case-by-case and, potentially, year-by-year basis.

Brokers will need to consider the overall level of their desired remuneration, and how much of an impact the £5,000 dividend exemption will have. If you already have a portfolio of shares paying significant dividends – a portfolio value in excess of £140,000 will generally use up that exemption – this will make the decision easier. However, the most

efficient route will depend on your level of income overall.

And, if other factors are in play, you can possibly (and maybe should) ignore all of the above. The pop out box gives you examples, which have remained unchanged for many years, as to why the immediate tax cost of taking profits may not be the only driver in your decision process.

Brokers seeking to establish the best long-term solution for taking profits from their company should take a look at their current methodology with their tax adviser, and ensure it remains relevant in the coming years.Tax payable 2015/16 Tax payable 2016/17

Basicratetaxpayer (20%)

£0.00 £7.50

Higher rate taxpayer (40%)

£25.00 £32.50

Additional rate taxpayer (45%)

£30.60 £38.10

TAX PAYABLE ON A £100 CASH DIVIDEND


Chris Riley Chris is a tax partner, specialising in corporation tax compliance and planning issues. He advises clients across the insurance industry, including brokers and Lloyd’s corporate groups.

broking business

PKF Littlejohn LLP, 1 Westferry Circus, Canary Wharf, London E14 4HD Tel: +44 (0)20 7516 2200 Fax: +44 (0)20 7516 2400 www.pkf-littlejohn.com

November 2015 ©

broking business

What makes a broker an attractive proposition to private equity?

There’s been a flurry of private equity deals over the past six months with investors ploughing significant sums into broking groups. We’ve taken a look at several firms involved in such deals and, although they differ from one another, we found they all display common traits that made them attractive platforms for investment.

Stability and scaleCash flows, without peaks and troughs, from a well-maintained and renewing portfolio of business with a steady profit margin. There’ll also be some external finance and a demonstrable ability to grow profit. Supporting this stability will be a business plan and a budgeting process which shows the firm’s capability in managing and meeting its budget expectations.

Management teamThe firm will have become corporate, where its overall identity is greater than the individuals driving it. The board of directors will focus, not only on its own objectives but also on those of the owners, leaving day-to-day operations

to a balanced management team with a wide variety of skillsets. Also, we observed that the management team might no longer control or handle client relationships.

A clear identity and a focused approachMost firms had a branded corporate identity and a well organised, simple and straightforward structure together with an easily recognised business focus and a definable client base. Generally all parts of the business were linked to the core activity so there was no distraction for the management team.

ReputationIn most cases, we found the firm’s management team was held in high regard in the industry and respected for its positive attitude towards staff, client satisfaction, compliance and the regulator.

Financial and transactional capabilityThe firm could report its financial position quickly and efficiently with some experience of external reporting, e.g. to banks or other investors prior to a bigger

deal. This gave it an understanding of the importance of the depth of information and timeliness of reporting.

The relevance of systems and controls would be recognised and their finance and compliance functions developed accordingly. In addition the management team, with a track record in either acquisition led or organic growth, displayed the capability of growing the business with the probability of continuing to achieve this being high.

ConclusionWhile these characteristics can be found in many firms involved in private equity transactions, they are features that any firm looking to flourish should be able to adopt.


John Needham John heads up PKF Littlejohn’s broking team. He has a wealth of experience of advising clients on client money, financing and succession issues as well as providing audit and tax.

This document is prepared as a general guide. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author or publisher.

PKF Littlejohn LLP, Chartered Accountants. A list of members’ names is available at the above address. PKF Littlejohn LLP is a limited liability partnership registered in England and Wales No. 0C342572. Registered office as above. PKF Littlejohn LLP is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.

PKF International Limited administers a network of legally independent firms which carry on separate business under the PKF Name.

PKF International Limited is not responsible for the acts or omissions of individual member firms of the network.

pkf littlejohn llp broking business for insurance brokers the … · 2015-12-01 · insurance...

Documents