Spitzer's inquiry sparks change

Analysis
By Ben Richardson
BBC News business reporter

Mr Spitzer is not afraid of taking on the biggest business names

Eliot Spitzer has been likened to a hungry dog with a bone - once he gets his teeth in, he is unlikely to let go.

The New York general attorney does not pick his targets lightly and he has made his name taking on and winning concessions from the biggest of big business.

His allegations that the world's largest insurance broker Marsh & McLennan fixed prices and was paid kick-backs sent commercial shockwaves across the globe.

Already the probe has widened, with attorney generals in other US states launching their own investigations and firms such as Aon and Willis being asked for documents.

Insurance stocks have taken a battering in the US, while in the UK and Europe investors are looking over their shoulders, asking themselves 'if it can happen Stateside, why not here'.

Complex con?

Mr Spitzer alleges that Marsh got illegal payments for steering clients to selected companies, as well as getting money for sending the least risky clients to their preferred firms.

He accuses the industry of putting in place "a system of false bids, fake bids, no bids. It rigged the market; this is classic cartel behaviour".

We are going to settle this case and settle this case in reasonably short order Michael Cherkasky, chief executive of Marsh

Not one to sit back and wait, Mr Spitzer wants to force changes, especially in industries where he feels companies are either abusing their position or not looking after the rights of the consumers, analysts said.

The man dubbed the "Sheriff of Wall Street" has gone after air polluters, Wall Street investment banks, drug companies, and the mutual funds in which the majority of US households have savings

Many of those targeted have agreed to overhaul the way they operate or pay fines rather than risk a further shredding of their reputation.

The feeling among analysts is that the insurance industry is likely to adopt the same approach, and overhaul itself.

Big stick

Already, Marsh has replaced its chief executive. A day later, it announced wide-ranging internal reforms.

New boss Michael Cherkasky said the changes were "going to revolutionise the industry", adding that he was confident of settling the charges brought by Mr Spitzer.

Michael Cherkasky told the BBC's World Business Report last month that "we are going to settle this case and settle this case in reasonably short order".

For consumers, that should mean a drop in costs as well as a simplification of the way the industry works. The insurance sector is often viewed as "opaque", even by industry analysts.

Despite the ringing of alarm bells and stock market jitters, the shock waves are likely to be muted on this side of the Atlantic.

Industry insiders say the UK insurance market, the world's largest, is subject to much stricter regulation than the US one.

The lawsuit's implications are likely to be felt across the industry

Across the pond

The UK Financial Services Authority, which will oversee the insurance industry from 14 January, told the BBC it was aware of Mr Spitzer's investigation.

But according to an FSA spokesperson, "You can't draw too many conclusions from that".

Insurance market Lloyd's of London, where brokers still wander the floor and business lunches often stretch until teatime, said any action was outside of its remit.

"We have been following the debate," it said in a statement. "If there are any regulatory issues here, that is something for the FSA. We do not regulate brokers."

To some observers, however, the authorities in the UK are just ignoring some very serious problems.

More needed

"I don't think rigging the market is possible, or easy, in London - there are far too many people involved," said Graham McKean, chairman of the BMS Group and a former Lloyd's board member.

Some of my underwriting friends say the practice was invented in London and exported to the US Graham McKean, BMS Group

However, Mr Spitzer's next target could be so-called policy service agreements which are also known as market service agreements, he said.

Under such agreements, underwriters pay brokers fees to be on the "shortlist" that brokers have been asked to draw up by their corporate clients, he explained.

The client, who has also paid a fee to the broker, is not told about the underwriters' fees.

"Mr Spitzer alleges that these are bribes, not fees for services rendered," Mr McKean told the BBC.

Such agreements have been widespread in London for decades, he said.

"Some of my underwriting friends say the practice was invented in London and exported to the US," he said.

Heads down

The spectre of Mr Spitzer has sparked a hasty retreat by some of London's leading brokers.

"They have not admitted they are illegal or fall foul of antitrust laws," Mr McKean said.

"But they have admitted that they have been doing it. Now they are saying that they are ceasing to do it."

If Mr McKean is right, then a complete overhaul of the industry is on the cards, both in the US and in the UK.