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  • The Bluefin U.K. FCA Final Notice – a sad example of the demise of the better than best rule

    By Adam Samuel

    Published January 11, 2018

    In the early days of modern financial services regulation, regulators insisted that independent financial advisers owned by product providers could only recommend their owners products if they could prove that these were better than the best alternatives in the market. This month’s Bluefin Insurance Services Limited fine suggests that it might not be a bad idea to restore the old pre-2001 position and extend it to general insurance and mortgages.

    Earlier this year, AXA sold Bluefin to insurance brokers Marsh, incurring an unpleasant £70 million loss. The firm’s £4 million fine, which presumably will be paid by AXA, will just add salt in the wounds. As ever, though, the FCA has shown no sign of acting against the senior managers at AXA which caused its subsidiary’s clients to take out insurance with AXA instead of what was best for them in the market.

    The story

    The “relevant period” for the fine was March 9, 2011 to the end of 2014. Bluefin called itself “truly independent”.

    Bluefin’s senior management had bonuses linked to business volumes placed with its owner. Bluefin had “synergy targets” of gross written premium volumes that AXA wanted to underwrite each year through its subsidiary. They aimed to place 25% of all business with AXA group “subject to treating customers fairly”. All staff knew of this, the Executive Committee’s objectives contained it and it affected AXA’s financial support for the business. None of these placement preferences were disclosed to customers.

    Between 2010 and 2012, the percentage of premiums place with AXA went up from 11.91% to 16.19% in 2012 although it later slipped back to 14.6%.

    Bluefin had a policy of introducing all Commercial Combined small and medium sized enterprise renewals to its owner before shopping them around in the market. Between 2011 and 2013, Bluefin focused on increasing AXA business placement and did this using a list of pre-selected products or “preferred facilities”. The 12 such facilities had standard wordings. One of the two preferred facilities for SMEs was an AXA one. These two generated Bluefin’s highest gross written premium. Bluefin told all its branches which customers were coming up for renewal and could be transferred to a “preferred facility”. Failure to follow this approach would be “closely monitored” and forced brokers to explain this.

    Bluefin never told its branch staff when preferred facility options would not be a good idea for clients typically they wanted cheaper cover. For the SME market, the AXA preferred option was highlighted as the “target”. In August 2011, Bluefin told brokers that all SME Commercial Combined business showing up on renewal lists must be offered to AXA. Ultimately, placement of business could be at the brokers’ discretion but they were told that AXA paid excellent commission rates.

    The lists of preferred options sent to the branches contained the commission rates involved and AXA paid easily the highest rates.


    Putting the business strategy well ahead of the customers’ needs and not explaining the disadvantages of preferred facilities led to a culture where brokers were discouraged from researching the market. It also deterred them from using market quotes to drive down preferred facility prices. Management constantly reminded brokers of their objective, namely to increase AXA recommendations and praised branches who placed significant volumes of business with the parent.

    Conflicts procedures

    All firms are supposed to have proper conflicts procedures, training for staff on managing conflicts and adequate reviews and monitoring. The policy focused on monitoring methods rather than guidance on identifying and managing conflicts let alone recording this. Training involved telling staff to tread the conflicts policy and doing a generic e-learning model. Having an insurer own the business created an inherent conflict requiring much more management than a single transactional conflict.

    Proper records should show how a conflict has been identified and managed, including the

    • basic transaction details;
    • the commercial rationale of the transaction from the customer’s viewpoint; 
    • the decision–making process and any specific analysis of potential conflicts done by the decision-makers involved or their supervisors about the nature of the conflict and its management; and
    • the significance of the risks connected with it and key mitigating factors.

    The company recommended but did not require brokers to note their reasons for recommending insurers. This led many advisers not to bother. As a result, Bluefin did not have meaningful management information or material on how the obvious conflict was managed. Completion of transaction checklists was not compulsory and the list did not remind advisers to consider the ownership-based conflict.

    One file involved a customer seeking a “best value policy”. The broker collected alternative quotes from other insurers and sought a matching price from AXA that was significantly cheaper than its original numbers. On the date of the old contract’s expiry, a non-AXA insurer indicated that it could cut £45,000 off the AXA price and promised a contract certain quote. None of this was disclosed to the client and external insurer was told not to bother. The inherent conflict of interest had clearly not been managed. 

    Checking things

    First or front-line checking was done by branch managers. Outcomes in terms of passes and fails went to compliance and branch managers. Unfortunately, though, the AXA conflict was not on the checklist until early 2014. The first-line were not “sufficiently proactive” in dealing with poor client paperwork or sales practices and was not risk-based with the same checks for everyone.

    Compliance picked up cases where the placement strategy had taken precedence over customer fair treatment. In one, the broker was pressured into transfer a customer to a preferred facility with a non-AXA insurer which paid a much higher commission than the original firm. A report to senior management identified that the 2012 branch objectives created a churning incentive.
    In one instance, a broker found slightly cheaper insurance with AXA with much more limited cover and in another the broker only obtained an AXA quote. The client then showed that another insurer could have beaten it by 50%.

    Second line picked up other material but senior management does not seem to have considered it. The final version of its 2012 Compliance Report seems to have been edited to leave out these concerns although the Board apparently did see the underlying information.

    The Risk Committee and compliance monitored the premiums placed with different insurers. However, there were no individual examples in the material supplied to senior management. It could not assess on the basis of individual recommendations how brokers were approaching their AXA conflict. Internal audit was done by AXA and did not focus on Bluefin or its risk appetite. It was hopeless.

    Oh the principles

    In an environment where the business model is skewed against the firm operating in the client’s best interests, it becomes almost a matter of taste as to which Principles the FCA wishes to evoke. Having gone on about treating customers fairly throughout the notice, the regulator omits to base its fine on Principle 6 which would have made more sense. Instead it focused on the firm’s Principle 3 (systems and controls) breaches which all follow from the business model.

    Of course, senior management was never going to tell Brokers how to handle the AXA conflict when their remuneration depended on it continuing. Management encouraged a failure to examine the market for the best option and created incentives to recommend the top-commission product.

    Clearly, Principle 7 (clear, fair and not misleading) was broken by Bluefin calling itself independent when it so clearly was nothing of the sort. In any event, the firm did not explain to clients how its brokers could be influenced by matters that were not in their customers’ best interests.

    This whole story is part of a bigger mess. AXA bought Bluefin including a financial planning arm. Although the latter has never been the subject of enforcement action, it basically disintegrated amidst grumbles about AXA management. The financial advisers went back to running their own firms and their clients followed them.

    There is quite a bit of evidence that providers buying IFAs does not work. The two businesses are very different and the inherent conflicts created by a provider owning an intermediary are never going to be managed easily. On top of that, in general insurance, the presence of commission bias in this and other instances should be leading the FCA into considering extending the RDR further.

    About the author: Adam Samuel is a lawyer and compliance consultant and the author of the only major book on financial services complaint handling. He combines diploma level qualifications with the CII, a complete set of certificate level CII exams, the CISI Diploma in Compliance with merit with his background as a barrister and attorney. Formerly the second PIA Ombudsman and an IOB Ombudsman's Assistant, Adam sits on the Ethics Committee of the Institute of Financial Planning and sat for seven years on the Practice and Standards Committee of the Chartered Institute of Arbitrators of which he was also the chairman of the Arbitration Sub-Committee for four and a member for ten. Adam is a regular contributor to Wolters Kluwer Compliance Resource Network.

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