Rule simpifications could air out commission disclosure debate
New conduct of business rules (NEWCOB) set to be implemented in November 2007 could reignite the debate over whether or not to disclose commission in protection key features documents, industry experts fear.
At the end of October this year, the Financial Services Authority (FSA) published its proposals for a radical simplification of the rules that firms must follow in carrying out investment business with customers. These rules will apply to all firms doing investment business, including life insurers and advisers, when they come into effect in 11 months' time.
While the regulator has been applauded for making this move, since it will mean a shift away from heavy regulation towards a lighter touch approach, there were concerns the forthcoming rule change could once again provoke a debate on whether or not protection firms should disclose their commission rates. Insurance conduct of business advisers currently do not have to disclose commission rates in the key features document, while conduct of business advisers do – a requirement that will be scrapped when the new regulation kicks in.
Mark Locke, spokesperson for Aegon Scottish Equitable, believes not disclosing commission could endanger the FSA's Treating Customers Fairly (TCF) initiative. He said: "The NEWCOB rules remove the requirement to disclose commissions in key features documents. This may reignite the controversy over whether to disclose commission in protection key features documents. We do, others don't. Our view is this is something consumers should know if you want to treat them fairly."
Agreeing with Locke, Jason King, managing director of Torquil Clark Life Insurance, said: "The amount of commission you are given is definitely a TCF issue. To fulfil TCF requirements you have to justify your income. If brokers can withhold this information it is likely they will. It is a thorny issue."
However, Kevin Carr, head of protection strategy at LifeSearch, said disclosing the amount of commission is not that relevant for protection advisers. "In protection, because there is no investment element for commission to eat into, what matters most to the customer is to get the right product at the right price – not the commission. This is because when it comes to protection, commission is the same across different products, the variation factor is the premium not the product. For those reasons it is not as important for customers to know the level of commission whether it is £2 or £2,000. There are many other areas of general insurance where commission is not disclosed where TCF is not an issue."
