Is payment to an intermediary, not by its client but by the financial service provider, an illegal inducement or a legitimate distribution cost?
In Hopcraft, the UK Supreme Court will consider this perennial question. The case is currently awaiting judgment after a hearing in April 2025 on appeal from the Court of Appeal.1 The Supreme Court will examine the legality of lenders paying car dealers undisclosed fees when they broker car loans for consumers.
The case will be keenly watched as the Supreme Court revisits fundamental principles of an intermediary’s fiduciary duties that are common to the supply chain of almost all financial services. Its conclusions may trigger regulatory action, including an industrywide redress scheme, and further civil suits in the motor finance industry and beyond. One such class claim is already pending before the UK Competition Appeal Tribunal.
Below, we consider the potential implications for the insurance industry.
Main Takeaways
- The insurance sector is one characterized by sophisticated intermediaries that do more than simply represent their client insured. They offer paid-for services to insurers inter alia on analytics, marketing, facilities, “side cars” and new underwriting platforms. They may also ask to be rewarded for the volume or profitability of business placed with the insurer. One UK study found more than three-quarters of broker fees come from insurers, not the brokers’ client insured. As softening markets may challenge profitability and necessitate consideration of a fresh approach to fee proposals, it is important to review new fee models for compliance.
- Intermediaries are subject to disclosure obligations to their client and should be aware that breach of these obligations can lead to liability for both intermediary and provider. Opaque payment arrangements run the risk of regulatory scrutiny, enforcement action and competition law liability.
- Precontract reviews of new fee models are important, to identify areas of legal risk such as additional payments by the insurer or fees outside the standard range. Companies should consider (i) the commercial motivation behind the payment, (ii) whether any additional services provided by the broker are of real value and demonstrably commensurate with the extra charge, (iii) whether the services are clearly defined in the agreement and (iv) whether the broker has provided clear disclosure to its clients. If the proposal involves a facility in which competing insurers participate (including new artificial intelligence-driven underwriting platforms), then a review of the market context, any restrictive terms and appropriate safeguards around use of data will be required. It is advisable to keep a record of the checks and controls involved in reaching the commercial decision to agree to a new fee proposal, in case these are needed.
- Companies should have internal systems and controls in place to ensure appropriate challenge, disclosure and consent of intermediary commissions to manage potential conflicts. Compliance with disclosure obligations should also be embedded in business practices through incorporation into staff training, process handbooks and compliance policies.
Background
Insurance is often transacted through an intermediary such as a broker. Traditionally, brokers charge their client insured a fee (brokerage) deducted from the premium. Brokers may also charge insurers fees, for example:
- Based on achieving preagreed profit, volume or other targets relating to the business placed (contingent commission).
- For additional services such as data provision, data analytics, marketing or industry reports, and potential pipeline business.
- For participating in co-insurance facilities or new digital platforms, such as algorithmic broker facilities.
- Subscription market brokerage, a commission intended to cover the costs of accessing multiple syndicates and managing complex arrangements in the subscription markets.
The UK Financial Conduct Authority’s (FCA’s) 2019 wholesale insurance broker study found that approximately 76% of broker remuneration came from insurers between 2012 and 2016.2 The European Commission (EC) found that in some EU countries, brokers earned more than 90% of their remuneration from insurers.3
Where appropriate disclosure and consent has not been secured, this could result in the broker facing a conflict of interest allegation, and in some cases lead to competition law issues.
In 2004, broker remuneration was the focus of one of the biggest, and most well known, regulatory investigations in the insurance sector. The New York state attorney general at the time, Eliot Spitzer, investigated allegations that certain brokers steered clients to insurers that paid contingent commissions and rigged bids to ensure the preferred insurer won business, including by the submission of fictitious or artificially inflated bids to give the illusion of competition.
The investigation secured nearly $3 billion in settlements from brokers and insurers, alongside compensation to civil plaintiffs of over $650 million. The settlement included a ban on contingent commissions and other incentives from insurers.
The inquiry sparked follow-on investigations in the EU and the UK which, in turn, raised concerns about the transparency of broker fees, such as the EC’s 2007 sector inquiry report. The Financial Services Authority (the FCA’s predecessor) and the FCA examined the issue, including in a 2007 report, 2014 Thematic Review results and 2019 Wholesale Insurance Broker Study findings.
Regulatory Rules on the Disclosure of Commissions
Brokers must disclose commissions in order to comply with the FCA’s Principles for Business and — more specifically — the FCA’s Insurance Conduct of Business Sourcebook (ICOBS), which outlines the standards of market conduct for the insurance industry.
The Principles for Business that are most relevant are:
- Principle 1: A firm must conduct its business with integrity.
- Principle 5: A firm must observe proper standards of market conduct.
- Principle 7: A firm must pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading.
- Principle 8: A firm must manage conflicts of interest fairly, both between itself and its customers, and between a customer and another client. This principle extends to soliciting or accepting commission where this would conflict with a firm’s duties to its customers.
ICOBS Chapter 4 details the requirements for intermediary firms’ disclosure of the nature and scope of the services they provide and their remuneration. In particular, a broker must provide a customer with information on the nature of the remuneration it receives in relation to the contract of insurance, and, on a commercial customer’s request, promptly disclose the amount of the commission it receives in connection with a policy. This applies to all forms of commissions and remuneration, including profit- and volume-related payments.
In addition, UK insurers that offer inducements (such as commission payments) should consider whether these arrangements meet the FCA’s expectations in respect of Principle 1 (acting with integrity) and Principle 6 (treating customers fairly), and are in the best interest of their customers.
The FCA will investigate and take enforcement action against authorised firms or individuals who breach any of the Principles for Business and/or ICOBS rules. This can include fines, reprimands or restrictions on their ability to operate within the financial market.
General Rules on the Disclosure of Commissions
Partially Disclosed Commissions
What about partially disclosed commissions? The general rule is that a broker is the agent of the insured and represents its interests.4 The law prohibits fiduciaries such as agents from profiting from their positions at the expense of their principal, and they should not put themselves in a position where there may be a conflict of interest.
If brokers receive payment from insurers, that represents a potential breach of fiduciary duty to their client insured unless there is appropriate disclosure and consent.
An agent will avoid breaching its fiduciary duties if it obtains the prior informed consent of its principal. This requires full disclosure of the material facts sufficient to enable the customer to provide fully informed consent. Where an insurance broker discloses the existence of commission, it will not always be necessary to also disclose the amount and basis of that commission.
Whether the client has been fully informed turns on the facts of each case, including the relative vulnerability and sophistication of the client and market expectation, i.e., whether the custom and practice of charging such commission was well known within the industry.
Disclosure and informed consent. The cases show that the appropriate disclosure requires a fact-specific inquiry. The disclosure standard may be lower where insurer-funded commission payments are “a well-established practice of the trade in the traditional insurance and reinsurance markets whereby brokers procure remuneration with the insurers or reinsurers, and not by arrangements with their own principals.”5 In such cases, disclosure of the amount of commission may not be necessary because it is standard or discoverable on inquiry. In contrast, in the “very specialised and particular market” of payment protection insurance where borrowers at the time were likely to be “relatively unsophisticated” and “vulnerable,” the court held that disclosure of the amount was required.6
The sophistication of the customer will be one consideration. But even sophisticated business customers must be sufficiently put on inquiry. In Expert Tooling, the Court of Appeal recently held “[t]he principle that it is insufficient for a fiduciary to comply with the requirement to obtain fully informed consent by putting the principal on enquiry holds good irrespective of how vulnerable, unsophisticated or otherwise the principal happens to be.”7 Similarly, the size of the payment will be a relevant consideration. Even sophisticated clients must be put on notice, where the commission was not an amount driven by custom and practice and was a “significantly larger percentage than would have been expected.”8
Accessory liability. The primary cause of action in the case of a breach of fiduciary duty is against the insurance broker, rather than against the insurer. However, a claim may lie against the insurer (as an accessory to the broker’s breach) if the insurer is dishonest in the sense that it is aware of, or deliberately turns a blind eye to, the facts that gave rise to the breach of fiduciary duty.9 Though the test is one of “dishonesty,” in practice the courts have applied a relatively low bar for this finding. It requires a conscious decision to refrain from taking any step to confirm a suspicion.10 The suspicion must be firmly grounded and not speculation. In Hopcraft, the Court of Appeal held that a lender “cannot assume that there has been full disclosure of the commission” by the broker and may be liable as an accessory if it does not “take it upon itself to give full disclosure to the consumer.”11 This in effect places obligations on a provider to disclose the commission arrangements if the broker has not done so. The Supreme Court will now have an opportunity to consider this point on appeal.
Remedies. Remedies may include equitable compensation for any loss actually suffered, recovery of the amount of the bribe or the ability to request (at the discretion of the court) that the contract be rescinded.
The insurance sector. In contrast to the “likely … vulnerable and unsophisticated”12 consumers in Hopcraft, in the insurance sector, particularly for business lines, the client insured may have a sophisticated internal risk function and understanding of different fee structures. Indeed, part of selecting the mandated broker may have involved the client requiring the broker to “pass through” additional fees or the client’s general understanding that competitive rates of brokerage are in part subsidized by other, insurer-derived, income streams. Older cases, for example, have indicated that payment of reinsurance commission by the insurer, rather than the insured, is well-established market practice.13 But as the more recent case law shows, the outcome is highly fact-dependent.
Regulation does not constrain general law. It is noteworthy that compliance with regulatory disclosures does not necessarily provide a defence. The Court of Appeal held in Hopcraft that fiduciary duties mandated a higher disclosure standard than financial services regulation requires. It was unlawful for the brokers (car dealers) to receive a commission from the lender providing motor finance without obtaining the customer’s informed consent to the payment. The FCA rules in the credit broking context only require disclosure in certain circumstances. The FCA has since intervened in the case to make a submission to the Supreme Court.
Secret Commissions
Unsurprisingly, if a broker and insurer agree to a commission that is kept secret from the client, in circumstances where the broker had a duty to be impartial toward the client, the commission may be treated by law as a civil bribe. Recent case law on the tort of bribery has held that a duty to be impartial applies in tandem with — but is not strictly the same as — a fiduciary duty.14
This position was challenged in Hopcraft, and the Supreme Court may take this opportunity to address tension in the case law as to the scope of the fiduciary duty.
In contrast to the position for partially disclosed commissions (where the insurer may be deemed to be an accessory to the broker’s breach), where a commission is kept secret and both the insurer and the broker have primary liability to the client, and there is no requirement to show dishonesty on the part of the insurer.
Remedies may include:
- Recovery of a sum equal to the amount of the secret commission.
- Damages relating to any actual loss suffered or rescission as of right (provided counter-restitution can be given for the benefits received under the contract).
The Court of Appeal in Hopcraft15 broadened this secret profit category in holding that, even where the customer documentation makes a generic disclosure that the intermediary “will” or “may” receive a commission from the lender, the commission could be considered secret if insufficient steps are taken to bring details of the commission to the attention of the customer. This is notwithstanding that, under contract law, parties are taken to have read agreements they have signed.
General disclosures are common in intermediary terms of business in the insurance sector, although a lower standard is likely to be applicable for more sophisticated parties and/or expected market practices.
Competition Law Considerations
As the Spitzer investigation showed, new remuneration models can also raise competition law risks.
Intermediary remuneration may not be sought or agreed in pursuit of anticompetitive conduct. The concern is that competition may be stifled if brokers are incentivised to recommend certain products over others, due to commissions likely to be received. This risk was made clear in the Spitzer complaint: Spitzer said, in relation to contingent commissions, that the “pressure to deliver business leads brokers to engage in bid rigging and other forms of market manipulation.”16 While contingent commissions are now less commonly used, any additional commission payment may create an incentive for “hub-and-spoke” cartels of the kind alleged in Spitzer. Red flags to look out for in arrangements include commission arrangements of little substance and requests for false or uncompetitive bids.
Considerations for facilities involving competitors. The substance of any new service offered should also be examined, particularly where these involve competitors. Some commercial lines are increasingly “facilitised,” with intermediaries leading a facility in which competitor insurers participate. It is important to undertake a competition law assessment of any brokered arrangement involving two or more competing insurers where pricing is restricted or delegated to a third party. This includes binding authorities, consortia and lineslips. This is because facilities involving competing insurers have the potential to restrict competition depending on their terms and the specific market context, including by aligning commercial conduct, sharing strategic business information or through anticompetitive foreclosure. EC guidance suggests there is unlikely to be a competition law concern if the combined share of the line of business written by the participating insurers is below 20% and the agreement does not contain strict restrictions, for example terms limiting competition outside the facility.
Digitally brokered arrangements are not exempt. The increasing digitisation of the insurance market has led to the widespread adoption of new technologies designed to make the insurance placement process more efficient. Brokers are offering broker facilities that provide real-time data analysis, and insurers are turning to enhanced underwriting techniques involving algorithms to help them codify and quantify risks or, in some cases, take risk decisions. These new arrangements should similarly be reviewed; “online” conduct, including conduct carried out via a third-party platform or algorithm, can be anticompetitive in the same way as conduct carried out “offline.”
Breach of regulatory disclosure rules in itself may be a factor in determining a serious competition law breach. The European Court of Justice in Allianz Hungária considered that restrictive agreements between insurers and intermediaries may be considered a more serious violation if they also involved a breach of regulatory (non-antitrust) duties. In Allianz Hungária, insurers paid higher rates for insured repair work to car dealers who met sales targets for that insurer’s motor policies. The parties claimed that any potential restriction on competition should be assessed by the impact (if any) of this alleged tie on the market (a “by effect” restriction.) The court held that to the contrary, this was a serious “by object” violation automatically restrictive of competition regardless of its actual effects. This was in part because the intermediaries were in breach of domestic consumer law, which required intermediaries to be independent from the insurer in advising consumers on the most suitable insurance policy.17 Similar reasoning was followed in a later case relating to a breach of data protection rules.18
Breach of regulatory disclosure rules may lead to private competition actions. Breach of regulatory rules may lead to private competition litigation, where stand-alone claims often make use of regulatory findings to support theories of harm. For example, a UK collective opt-out claim was brought in 2023 against several car finance providers, in parallel to the Hopcraft proceedings, alleging that brokerage agreements between motor finance providers and car dealerships were anticompetitive because they included commission models that linked a broker’s commission to the interest rate paid by the customer — known as a discretionary commission arrangement — which incentivised the dealers to broker the car finance agreements for certain customers at a higher interest rate than would otherwise have been the case.19 The claim followed an FCA review of the motor finance sector that found particular concerns with the use of discretionary commission arrangements and the transparency of commission payments.
Final Thoughts
The scrutiny of intermediary remuneration is far from a new topic for regulators. However, the ongoing motor finance litigation has brought it back under the spotlight, which may lead to increased oversight of intermediaries across the financial services sector.
While insurer-derived commission arrangements are legal, companies should ensure that their compliance procedures adequately cover the risks of payment structures, appropriate disclosure and client consents to ensure that clients understand any potential conflicts of interest that may exist.
Businesses should also continue to monitor legal developments in this area, particularly against the background that the regulatory regime does not constrain the development of common law by the courts in the same area. The Supreme Court’s forthcoming ruling in Hopcraft (expected in or around July 2025) will confirm the general disclosure rules regarding intermediary commissions, although it remains to be seen whether the decision will extend beyond the immediate consumer context.
Professional support lawyer Elizabeth Malik contributed to this article.
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1 Johnson v FirstRand Bank Ltd (London Branch) (t/a MotoNovo Finance); Wrench v FirstRand Bank Ltd (London Branch) (t/a MotoNovo Finance); Hopcraft v Close Brothers Ltd [2024] EWCA Civ 1282 (Hopcraft).
2 FCA, “Wholesale Insurance Broker Market Study Final Report: Annex 4 – Pay-to-Play,” Figure 3, February 2019.
3 European Commission, “Sector Inquiry on Business Insurance Final Report,” p. 54.
4 Newsholme Bros v Road Transport & General Insurance Co Ltd [1929] 2 KB 356.
5 McWilliam v Norton Finance (UK) Ltd (in liquidation) [2015] EWCA Civ 186, paras 53-54.
6 McWilliam v Norton Finance (UK) Ltd (in liquidation) [2015] EWCA Civ 186, paras 53-54. See also Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2019] EWCA Civ 83, para,. 42; and Expert Tooling and Automation Ltd v Engie Power Ltd [2025] EWCA Civ 292, para. 155.
7 Expert Tooling and Automation Ltd v Engie Power Ltd [2025] EWCA Civ 292, para. 76.
8 FHR European Ventures LLP v Mankarious [2011] EWHC 2308 (Ch), para. 104.
9 Twinsectra v Yardley [2002] UKHL 12.
10 Manifest Shipping Company Limited v. Uni-Polaris Shipping Company Limited and Others [2001] UKHL 1.
11 Hopcraft, para. 128.
12 Hopcraft, para. 58.
13 Lord Norreys v Hodgson (1897) 13 TLR 421; McNeill v Law Union & Rock Insurance Co Ltd (1925) 23; Lloyd’s List Rep 314 and Pryke v Gibbs Hartley Cooper [1991] 1 Lloyd’s Rep 602.
14 Wood v Commercial First Business Ltd & Ors [2021] EWCA Civ 471.
15 Hopcraft, paras. 108-119.
16 Hearing on insurance brokerage practices before the U.S. Senate Subcommittee on Financial Management, the Budget and International Security of the Committee on Governmental Affairs – Testimony of Eliot Spitzer, attorney general of the state of New York, 16 November 2004.
17 Case C- 32/11 Allianz Hungária Biztositó Zrt and Others v Gazdasági Versenyhivatal, Judgment of 14 March 2013, paras. 46-48.
18 Case C-252/21, Meta v Bundeskartellamt, Judgment of 4 July 2023.
19 Case 1599/7/7/23, Doug Taylor Class Representative Limited v Black Horse Limited and Others, stayed until 31 July 2025.
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