The Association of British Insurers' (ABI) recently outlined proposals that could spell the end of commission-based financial advice. Are its accusations that commission creates bias and questions the advice given to consumers well founded?
Market views
Jan Lawson, The Private Health Partnership
The ABI report and subsequent consultations focus on the provision of advice on finance and savings options rather than risk based insurance products.
These products have traditionally had high front end charges to facilitate the payment of large initial commissions, usually indemnified, and much smaller renewal commissions.
This reflects the fact that for much of the consumer market, they have had to be 'sold' rather than 'bought', and the presence of attractive commission has encouraged IFAs to promote advice on savings products.
The question is not whether commission actually influences the adviser's choice of product provider but whether the consumer can be confident that the adviser is acting without bias. To this end, I would support the ABI's proposals to simplify commission structures, abolish indemnity commission and reduce initial commission in favour of higher ongoing commission.
However, any changes in commission structures should be matched by changes in product provider charging, so consumers benefit from a better spread of charges and are less harshly penalised for early termination of a savings arrangement. These penalties, which are a focus for bad publicity and consumer cynicism, do more to undermine the financial advice market than the method by which IFAs obtain remuneration.
Alan Lakey, Highclere Financial Services
The ABI is putting forward suggestions based on recommendations from Charles River Associates (CRA). The Financial Services industry has repeatedly suffered from problems caused by well-meaning, non-industry experts interfering, so let us hope this is not another poorly thought out idea.
The most publicised aspect is the abolition of indemnity commission. The implication being that it causes product bias and dents consumer confidence. Pointedly, CRA found scant evidence of such bias and Sandler emphasised that such incentives serve to stimulate savings.
Indemnity commission has already been effectively removed from stakeholder pensions and surely it is no coincidence that sales of these products have been disastrous. Will the removal of indemnity commission increase consumer confidence? No. Will it assist in reducing the savings gap or increasing the levels of insurance per head? No. What it will do is remove a large section of the small IFA community, which relies on indemnity commission as a cashflow tool.
Ongoing commission could be factored in, providing cashflow benefits, but would this eliminate bias or restore consumer confidence? In my experience, clients do not care about levels of commission although they often quail at the prospect of paying a fee or a retainer. Will anybody benefit from the removal of indemnity commission? The bancassurers will be able to offer 'free' advice from a phalanx of salaried staff paid from the profits of the in-house insurance company. Sounds like commission, sounds like Equitable Life.
Dermod Atkinson, Sunday Group
Commission is integral to the industry and many firms and advisers need it to survive. If the label 'commission' was changed to 'marketing allowance' or 'distribution cost', would there still be the same negative views?
The question of indemnity commission on regular premium business should not be one of product/provider bias but more one of sound business fundamentals. Prior to full Financial Services Authority regulation, how many advisers sold what were formerly known as deregulated or non-regulated products with a two-year clawback, then as soon as either a change was needed or the indemnity period was at an end, 'rebroked' the business to earn large chunks of commission?
Clearly there is no underlying value in those businesses. Until the industry can run IFA practices in a much more commercially viable way, which can only be achieved by a combination of economies of scale, diversity of products and services, and diversity of income streams including commission, then debates of this nature will continue.
Geoff Tresman, Risk Placement Services
The CRA boldly states in the opening line of its report to the ABI, "This paper is about the customers...". How unfortunate then that it follows the familiar pattern of so many official reports that purport to be in the public interest, but fail to ask the customer what they want, and assumes the author knows best.
While the report concludes that there is little evidence of commission-related bias, comprehensive and far reaching recommendations are made that will, if acted upon, radically change how financial products are delivered.
Many of the recommendations have been openly debated for some time and have broad support, such as simplification and standardisation of the commission structure across the industry. The same support should be given to allowing the consumer the right to at least influence who gets any trail commission in the event that the IFA is replaced with another.
To suggest, however, that the customer should have the right to renegotiate the terms of a policy, post sale, with the provider trading the adviser's commission for lower charges, is nonsense. Nothing will be served by introducing another layer of reporting to the customer by way of an in-depth audit of the commission paid to the IFA, breaking that down between product, advice and commission type. There are flaws with both the fee and commission route, with equal opportunities in each to deliver both poor and good value for money. Ask most people what they want and they will say choice and to be left alone to exercise it.
