The regulator looked at seven of the largest intermediaries who serve small business clients and concluded that in some firms, control frameworks and management information have not developed at the same pace as business models.
Research into the understanding of small business customers also demonstrated that few understood that there was a possibility for their insurance intermediary to be conflicted.
Clive Adamson, director of supervision at the FCA, said: "Small businesses are experts in their particular field but are often not experienced in buying insurance.
"That is why they need to be able to trust their insurance intermediary to act in their best interests. If there are conflicts of interest that are not identified or properly managed, that trust is put at risk."
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The FCA focused its review on small business customers, saying they have more complex insurance needs than retail clients but are not always more sophisticated buyers of insurance. As a result, small businesses often rely on insurance intermediaries for advice. The FCA wanted to establish how the flow of revenue from insurers or other sources to intermediaries could affect how customers were treated. It found that:
· there was increased risk of conflicting interests where firms fulfilled multiple roles in the distribution chain and acted as agent for both the customer and insurer in the same transaction;
· some intermediaries relied on disclosure as the main way to address conflicts of interest rather than having effective control frameworks in place;
· disclosure provided to customers was sometimes very generic and unlikely to meet their information needs or enhance their understanding; and
· conflicts of interest were not always effectively mitigated in relation to add-on insurance or services, premium finance or where the cost of insurance is borne by a third party.
Consumer research also revealed that small businesses were not aware of the differing roles intermediaries can perform. Many (68%) believed that intermediaries acted as their agent when selecting and placing their insurance. A large majority (86%) of small business policyholders expected their insurance intermediary to search for more than one quote, which was not consistent with placement processes within some intermediary firms.