Wall Street Brokers Want ‘Even Playing Field’ on Compensation

Big insurance brokerages that lost billions of dollars in revenue under a ban imposed by former New York Attorney General Eliot Spitzer told the state’s regulators recently that the rules were never applied universally, and should either be lifted or imposed across the board.

Marsh & McLennan Inc., Aon Corp. and Willis Group Holdings all ceased taking so-called “contingent” commissions after Spitzer cracked down on the practice in 2005. Three years on, the brokerage triumvirate agree that regulators have more work to do on the reforms that Spitzer began, but differ on exactly what should be done.

Willis wants the ban more widely enforced, while Marsh and Aon called for a “level playing field,” whatever the regulators’ decision.

Whether these commissions pose a potential conflict of interest for brokers is again being put under the microscope because smaller U.S. brokerages have continued to accept the fees, paid by insurers to brokers who bring business to that carrier.

“The unlevel playing field has clearly hurt Marsh,” Dan Glaser, chief executive of Marsh Inc, MMC’s insurance brokerage arm, told representatives of both New York Attorney General and New York insurance superintendent at a hearing in Manhattan.

Following the 2005 ban, Marsh had to cut a third of its workforce, Glaser said, and lost other employees to smaller rivals who were not bound by the fee rules.

“The problem with the current regulatory approach is that it did not result in an industry-wide solution,” said Glaser. On top of lost revenue, Marsh & McLennan paid $850 million in fines and restitution as part of a settlement with Spitzer.

In 2003, the year before regulators began to investigate the practice, brokerages took in an estimated $3.7 billion just from these commissions, according to figures compiled by insurance rating agency A.M. Best.

Smaller Brokers

In the intervening years, smaller brokerages that can still accept the commissions have taken in even more — $4.56 billion in 2006, said Aon Risk Services Chief Executive Steve McGill, according to a statement of his testimony. Aon holds that Spitzer’s concerns about the contingent commission practice may have been overblown, and could be addressed with stiffer disclosure requirements.

“Aon does not believe that such compensation poses an irreconcilable conflict of interest… nor does Aon believe that contingent commissions unavoidably result in steering clients toward less favorable insurers in order to maximize a producer’s revenues,” McGill said.

But if regulators do give large brokerages a green light to accept contingent commissions, McGill said there needs to be much clearer, industry-wide rules over how these arrangements are disclosed to customers.

It is unclear what regulators will decide, but last year they softened some of the rules imposed under Spitzer, allowing some payments for supplemental services while keeping the ban contingent commissions in place.

Willis, in a stance at odds with its larger rivals, said it favors a continued ban on the commissions. Don Bailey, chief executive of Willis North America, said at the hearing: “Former Attorney General Spitzer missed a great opportunity to do the right thing by banning all brokers from accepting contingents.”

Bailey called for a formal, industry-wide ban of the commissions, effectively echoing Willis’ view that the practice is wrong.