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A history lesson

In the first of a series examining how depolarisation could change the financial services market, The Strategy Works managing director Michael Herson looks at the rapidly changing background to the new regulations

How much will depolarisation really change the way the insurance and pension market operates?

To understand what is likely to happen in the future, it is important to look at the speed of change in the past 20 years.

Traditionally, pensions were linked closely with the workplace, with employers’ contributions matching those paid by their employees. Generous future entitlements made the decision to enter the scheme easy for most employees.

Big salesforces employed by the major insurance companies also sold tax-advantaged life and pension products direct to the public, often visiting their customers to collect weekly premiums.

In the first major Government intervention, the 1988 Financial Services Act brought about polarisation and regulated the market to protect consumers. Brokers were compelled to become independent or tied to one insurer.

Competition increased and commission rates rose sharply as providers pursued new business. The abolition of the maximum commission agreement created a scramble for IFAs to sell the products with the highest commission, without disclosure.

The move to increase transparency through disclosure in the 1990s meant IFAs gained a competitive advantage over direct salesforces. Then a sea change took place in the way products were sold. Providers began to shed their big direct salesforces. Teams comprising thousands of people were reduced to a few hundred.

Some 60,000 licensed advisers became established, mostly operating locally. Many became in-house advisers for mortgage brokers and banks but 26,000 became IFAs. Over time, some big national and regional firms of IFAs emerged but, in terms of the number of advisers employed, these now account for fewer than 5 per cent of the total.

In terms of business written, the IFA market has recently concentrated to the extent that about 350 of the top firms account for about 75 per cent of the market.

Prudential director of distribution Andy Briggs sees this trend continuing, with about 150 to 200 IFA firms taking 75 per cent of the market in a few years.

Some providers are hedging their bets by taking stakes in firms of IFAs, reflecting how much they depend on third-party distribution they have become. Friends Provident has taken stakes in four IFA firms, the biggest of which is in Lighthouse Group (9.6 per cent). Standard Life has taken a small stake in Tenet while Bankhall was bought by Skandia three years ago.

To compete on a level playing field with the bigger IFA firms, one of the major developments has been the emergence of IFA support organisations such as Sesame (8,100 members) and Bankhall (7,500 members). These provide essential services such as compliance, research and training and can negotiate more favourable commission rates with providers than individual firms. These are not as formal as franchises but more like commission clubs. None of these umbrella groups have become consumer brands in their own right as they remain almost unknown to the public.

Within a relatively short timeframe, the major providers have reinvented themselves as B2B rather than B2C sales organisations and have effectively “abandoned the playing field” in respect of new life and pension sales, according to Legal & General head of planning and strategy John Maud.

IFAs have occupied the new ground and grown their market share to 48 per cent today. To illustrate the imp- act of this change, Pruden- tial – which traditionally had one of the biggest direct salesforces – now achieves 10 per cent of its business from this channel compared with 90 per cent via intermediated channels.

Given their new B2B sales model, providers have switched emphasis away from the consumer to the support infrastructure required for the main intermediary sales channels. Many have account managers aligned to firms of IFAs, with some relationships managed over the phone, plus specialist support in the field for particular product areas. Bigger firms enjoy dedicated service teams providing continuity of contact through named individuals.

Smaller IFAs may be serviced by the development of online access to information or deal with a call centre for quotes and new and existing policy administration. This may include direct electronic links between the provider and the IFA’s systems.

Banks, particularly those with tied relationships, require integration of processes, systems and management information in some depth, with a shared investment in improving service. The support function is at its strongest when the multi-tie is being set up and even afterwards will remain full-on as IFAs generally require development and self-help.

The Pru’s Briggs says: “Our account management teams provide marketing, business consultancy, training and e-based solutions.”

But what was not fore- seen by the 1988 legislation was how rapidly natural market forces would take over. Unlike other forms of insurance, such as car insurance (compulsory) or household (a condition of the mortgage), there is little consumer appetite for pensions and life insurance.

Friends marketing director Graham Harvey says: “The consumer is largely disinterested in our products.”

L&G’s Maud says: “This is not a product that most people desperately want to go out and buy.”

Standard Life managing director (marketing) Simon Douglas says: “We are not just competing with other investment options, we are competing with holidays, clothes and mobile phones. Changing behaviour requires much more fundamental and cultural change.”

The industry has suffered from adverse publicity over many years which has contributed to the erosion of public confidence. We now face a situation where, according to Sesame, some 32 million people in the UK do not take financial advice.

This is being exacerbated by corporates rushing to the exit door with their defined-benefit schemes, due to severe underfunding caused (until very recently) by the falling stockmarket. Only the public sector remains an attractive haven for such schemes.

Against this backdrop, a further wave of legislation has come into force, bringing depolarisation to the market. Further regulations and compliance governing training, examinations and sales ethics have been brought in to raise standards in the industry, protect consumers and win back confidence.

Depolarisation adds a third model to the sales channel – multi-ties – allowing an IFA or tied agent to select from a panel of product providers.

Sesame head of propositions & commercial development Alastair Conway says: “Sesame welcomes it. We feel the market needed to move on from the tied/IFA model where there was lack of choice. What depolarisation fundamentally does is open up the market. It means advisers can choose to mix their advice propositions to meet consumers’ needs.”

Briggs sees it as an opportunity to improve the cost of doing business. With fewer IFAs to market to and transact with, the economics of distribution are enhanced for providers. They can concentrate on providing the vehicles for investment as opposed to the advice and personal service.

It is widely regarded that banks will be one of the major winners from the introduction of multi-ties as they have the traffic going through their branches and are in a better position to influence consumer behaviour.

Douglas says: “I think the opportunity for banks to play a big role in distributing life and pension products is coming back.”

Barclays has been the first big-five bank to declare its intention to go multi-tied with up to five insurers, including L&G. Prudential claims a unique position as being the only provider on all the panels announced to date (Sesame, Millfield, Thinc Destini, Tenet and Barclays).

Consumers will inevitably feel more at ease with being offered products from a choice of providers while retaining the advice of their IFA. But L&G believes no more than 10 to15 per cent of IFAs have so far elected to switch to multi-ties or will do so in the near future.

Prudential says it will take three years for about one-third of IFAs to switch over as Briggs says: “They need to work through the emotional issue of losing their independent label.”

However, the increasing regulatory burden for IFAs and caps on commission and charges are points that Douglas finds hard to accept. The requirement to fulfill lengthy fact-finds for simple products and the onerous level of paperwork means that, for many advisers, it is becoming a task they cannot complete cost-effectively.

Douglas says: “It is incredible that we live in a country where we are happy to let people get into debt. We have no limit on how much people pay to borrow but we have a limit on how much people pay to save. It is absurd.”


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