It has been a long time coming but regulation has finally worked to eradicate poor practice
In March 1962 a small, prematurely grey, former lieutenant in the US Airforce arrived in London and took offices in the West End. His mission was to establish a “pyramid” direct sales force on behalf of Investors’ Overseas Services, founded by a man called Bernard Cornfeld to sell mutual funds around the globe.
IOS had enjoyed great success over the previous few years, mainly selling products to US servicemen who, 20 years after the Second World War were still based in foreign countries earning decent money with not much on which to spend it. The product was a regular or single payment into a US based fund with a panel of third party fund managers. It was called The Fund of Funds. Sound familiar?
Unfortunately for IOS, there were a couple of unexpected challenges in the UK. First, the Prevention of Fraud (Investments) Act 1958 stipulated the only people that could sell mutual funds were stockbrokers and they were unlikely recruits, to say the least. The second was that, due to the weak pound and a weak economy, there were financial penalties when moving money out of the UK.
But IOS had met and avoided, or actually evaded, unhelpful regulation before. They called their approach “Blue Sky Law” – there was always a little bit you could find if you looked hard enough.
Law firm Freshfields came up with the solution. It was described as “insurance linked to equity growth” and it had answers to both problems.
First, insurance could be sold by anybody at all. Second, re-insurance premiums were exempt from the financial penalties imposed on other payments to the US. The company it formed was called International Life Insurance. It was my first employer. The product was called the Dover Plan.
And then it hit an unexpected jackpot, which led to huge sales for some years. To its astonishment and delight, IOS discovered that income tax relief was allowed on any single or regular payments into any life policy. This meant investment into a Dover Plan cost substantially less than a direct investment into a unit trust. And that was after the unsurprisingly high commissions and other charges.
I think the pyramid paid out 10 per cent upfront on a single premium. Incredibly, the actual charges were not spelled out. In spite of that, sales soared and the sales force – described as “associates” – grew. My recollection is that their training revolved around a tape recording entitled: “Eight ways to close a sale”.
In 1966, equity markets in the US and UK fell by about 20 per cent in a few months. ILI policyholders of all shapes and sizes started complaining. As if that was not enough, regulation was passed that removed most of its unique selling point.
The 1968 Budget decreed that policies issued from that year would need to be “qualifying” to get tax relief. Many forecast this would be the end of unit-linked products. Something to think about on the 50th anniversary of that regulation this March.
In spite of the bad publicity ILI received, and the removal of the huge tax advantage, over time the unit-linked insurance proposition was adopted by almost all of the traditional life companies and about 30 new entrants, most of whom were distributing through direct sales forces.
Almost all of these closed to new business when regulation started to demand higher standards of referencing, training and disclosure. The network model then emerged, providing a home for sales people that enabled them to increase commissions and offer a broader service to clients.
So, here we are, approaching 50 years of regulation, starting with the invention of qualifying policies and continuing with Mifid II and Priips implementation. On balance, almost every constituency has benefited – though I am not too sure about Mifid and Priips.
Most of the salespeople in the 60s, 70s and even the 80s joined an industry devoted to pushing products and the vast majority did not make it past year one.
Now, we have a profession delivering excellent, fee based financial advice and investment solutions to thousands of people each week, changing their lives for the better. It is a different world. And it is encouraging to see the number of advisers is increasing slightly.
As for IOS, it listed on the Canadian Stock Exchange in 1969, at which point Cornfeld gained about $14m in cash and about $90m on paper. The question asked of potential sales recruits to IOS in the interview was often: “Do you sincerely want to be rich?” And some successful sales people became very rich indeed.
For others, the opposite was true. Persuaded to borrow money to buy a “privileged allocation” of shares, salespeople and staff were under water rapidly as questions began to be asked about accounting principles, asset valuations and dealings that did not survive the scrutiny to which a listed company is subject. In the end, IOS shares were worthless. I think my attitude to risk stems from this event.
Happily, International Life Insurance survived. And who knows, it may still have a Dover Plan on its books. The company is now called Lincoln and is owned by Sun Life of Canada.
Malcolm Kerr is senior adviser at EY