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Spitzer's World

The disgraced former New York attorney general and governor affected a lot more than the U.S. brokerage industry. His influence has been felt worldwide.

By  Coletta Kemper

Just five years ago, the name “Spitzer” put the fear of God into our industry. Eliot Spitzer is long gone from a public life of power—first as New York attorney general and then as governor. Exposed, defrocked and discredited—quite a fast fall. He occasionally pops up on some news show as a commentator, but his fan base is greatly reduced.

To add insult to self-imposed injury, Spitzer’s controversial 2004 agreements with the top three brokers, which forced them to forego contingent commissions (and cost them millions to settle), began unraveling last summer.

In August, the Illinois insurance department said it would allow Arthur J. Gallagher & Co. to receive contingent commissions again. (Gallagher’s agreement was with Illinois, not New York.) That announcement was followed by a report that state regulators and attorneys general in New York and Connecticut were considering similar dispensation for Marsh, Aon and Willis, the prime targets of Spitzer’s investigation.

Connecticut Attorney General Richard Blumenthal, who was party to the Spitzer inquiry, said regulators “are sensitive to the need for a level playing field, so companies are treated equally.” That’s a far cry from Spitzer’s “shock and awe” strategy.

Not that any of the brokers will recoup any of their settlement costs, even though the New York Supreme Court last year ruled that contingent commissions were not illegal. But there is a small price to pay for the reversal on contingent commissions, at least in New York, which is calling for agent and broker disclosure—a practice that most commercial agents and brokers have already adopted in one form or another.

The New York proposal circulated in September sets out the minimum disclosure a producer must provide a customer orally or in writing prior to the application of insurance and at renewal. The producer must also tell customers of their right to request additional information on compensation. Some version of the proposed regulation is expected to be final by the end of the year.

Spitzer’s gone, but we’re still living with the aftermath. Ironically, his investigation may have had a greater impact in other parts of the world. A number of countries have adopted agent/broker disclosure rules from the bare minimum to overkill. Here’s a look at how Spitzer-influenced disclosure rules affect a few other countries.

Australia requires disclosure to “retail” (individual and small business) clients. However, all brokers have a general obligation to provide “clear, concise and effective” information about any compensation or possible conflict of interest at a “reasonable” level on any product—retail or commercial.

The three broad areas of disclosure are: (1) explaining the services being offered by the broker, how the broker will be paid and whether the broker is acting on behalf of the client or the insurer; (2) providing additional disclosure where “personal” advice is given to ensure suitability of the product; and (3) providing clients with information about the policy being purchased.

In the U.K., life agents must disclose fees and commissions in writing for policies with an investment element. While there are no formal rules for personal lines clients, there’s an expectation that the intermediary will disclose information if requested. Last December, regulators decided not to mandate broker disclosure for the commercial sector but strongly suggested that the industry take steps to provide commercial clients with more transparency. The industry developed guidelines that require brokers to clearly inform clients of the right to ask about compensation and to disclose all earnings, including contingents. Any fees must be agreed in advance. Brokers must develop internal policies for managing conflicts of interest and have written policies and procedures in place on disclosure.

Countries with some level of mandatory compensation disclosure include Estonia, Italy, Latvia, Norway, Spain, Sweden and Slovenia. Portugal requires disclosure at the client’s request, as does France when compensation equals more than 20,000 euros. In Hungary, disclosure is recommended.

Denmark, Finland and Norway prohibit brokers from receiving any commissions from insurance companies. Switzerland recently introduced legislation that would, in effect, impose a fee-only system on brokers. Under the proposal, commissions belong to the policyholder. Swiss brokers are negotiating with the government to remove the objectionable language; however, the trade-off may be full transparency and a ban on contingent commissions.

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