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Clouded judgement

Tony Bridgland says banning commission for IFAs is the wrong approach when a simple return to tried and tested practices could keep small firms in business and boost savings rates

FSA: Decision to ban commission is said to be to avoid provider bias
FSA: Decision to ban commission is said to be to avoid provider bias

When I was a young Man from the Pru, circa 1960, there was scarcely a working-class kitchen in the country that didn’t have a couple of premium receipt books propped up behind the clock on the mantelpiece, ready for the local agent to sign when he called for his weekly premiums. The Pru alone was reckoned to call on one house in every three in the country.

Practically every policy had had to be gently sold by the agent, rather than bought, such is the abstract and distant quality of long-term thrift, especially at the younger ages.

Every housewife knew that the local agent worked on commission and, in general, he was well respected.

It has been 50 years but I do not recall ever being asked how much commission I earned and never had any real complaints.

On the ordinary (upmarket) side, the Life Offices Association kept an eye on good practice by the life offices. The payment of commission in advance of receipt of premiums, known as indemnity terms, was strictly forbidden. Very wise.

We were, in general, a healthy, thrifty society.

I was never very clear as to why the good old sensible Life Offices Association somehow dissolved and disappeared but it was at about the time that unit-linking appeared on the scene around the mid 1970s, along with the likes of Abbey Life and Allied Dunbar and their armies of aggressive commission-only salesmen leading the invasion. Such was their influence that very soon indemnity terms’ commission became commonplace.

The converse of the old adage, where there’s muck there’s brass was proved overnight. I still have a letter from an Allied Dunbar manager admitting that one of his mob had given my old mum bad advice.

Nothing will ever convince me that it was not the appearance of the longscorned indemnity terms that infested our industry with such odious effects that led to the excuse to regulate us at all in the first place. And the regulation itself has taken many a cock-eyed look at real life.

For example, at about the time when I was hauled up because my name on my business cards was not in large enough print, I discovered that life offices did not have to record in their official returns the amount of unearned indemnity terms’ commission they were owed.

Royal Sun Alliance’s returns comprised 390 pages, yet they had no need to show how many millions of pounds they had laid out in advance of any premiums being paid, in other words, unsecured loans.

Still the quest for excuses to tighten the rules on IFAs continues, such as the decision to abolish commission.

An FSA spokesperson told me that the main purpose of doing this was to avoid provider bias. This perplexed me a bit, because it was déjà vu. I remember, back in the bad old days when I was a regulated zombie, and they had pushed me to the brink of insanity, having to produce a regular analysis of all our commission income, ready for our next compliance visit, showing the amount received from each provider.

If any one provider was the source of more than 35 per cent (later merely 20 per cent) of the whole, without full and proper justification, the possibility of dreaded “non-compliance” raised its head.

The purpose then too, supposedly, was to guard against provider bias.

How the said bias works against the client, I cannot fathom. It is pure control freakery. It was beyond their imaginations to see that the simplest way to avoid any of the undesirable effects of the said bias, whatever they are, would have been to resurrect the old LOA system, where everybody paid the same standardised commission rates and indemnity terms were strictly forbidden.

And bring back the old Stone & Cox tables, which enabled an IFA to use his professional judgement in choice of provider and to stand or fall by it.

I asked if there were to be any exemptions. Yes, apparently “execution-only” and existing business. So we could still have commissionearning lingering on until maybe even 2040 and later.

Another little accounting sideplay to cope with, just to keep us busy. But what about the effects on the future of the life offices? And, come to that, how will it affect the nation as a whole?

The FSA spokesperson admitted it would cause more paperwork. No real cause for alarm there then. You should all be able to cope with a bit more, what with all the practice you get.

It has always been one of my main criticisms of the FSA that it requires the small, country IFA who concentrates mainly on personal finance planning and individual savings schemes to follow the same rulebook as the big City-based outfits, with their books full of large group schemes and complex corporate planning cases. Two completely different industries.

Charging a fee by one of the latter in lieu of commission would probably not cause too much of a problem, provided that it is reasonable. Many do so already.

But try saying to a person, just after he has signed a proposal for a £75 per month 10-year savings policy: “My fee for talking to you and filling in this form will be £150, if you could just give me your cheque.” You would depart with your ears ringing.

I can see the end of the road for the small IFA and some of the few life offices left disappearing and the country will be far less thrifty. The FSA, up in the clouds of E14, seem not to have realised what a huge contribution the mass of small long-term savers make (or used to make) to the country’s economic health.

They have always hated the small IFA. Now they have resolved to thrust in the final dagger. They could come to their senses before 2012 and compromise by allowing small business, within defined limits, to carry on earning commission. They could, but I wouldn’t bank on it.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. I have no problem with “Independent Brokers” carrying on selling products for commissions but I wish they would stop calling themselves IFAs and Financial “advisers”.

    These type of articles really disappoint me as I believe there really needs to be a break between advice and product sales.

  2. Well done Tony. This article really tells it as it is. I have forwarded this on the the Small Firms Panel to ensure they have at least read it. Peter Meadway PM Independent Financial Services

  3. Tony Bridgland`s article is full of common sense. I have been in Financial Services for 40 years also attaining the very highest levels, and am staggered hat FSA committees cannot reach the same conclusions as Mr Bridgland.

    My advice would be to retain commissions as an alternative to fees, but ban indemnty commission and ban providers from offering additional incentives to IFA´s for bulk business provision and this would solve the majority of selling problems at a stroke.

    This would then assist smaller IFA´s to maintain the provision of individual advice to smaller wealth (or no wealth) clients and the whole country would benefit from a more balanced approach.

    You do not need to be a rocket scientist to know that smaller clients will not generally accept any form of up front fees for advice. The reason why individuals deal with IFA´s is mainly to obtain advice and expertise to generate assets and make the most of what they have or receive.

    The FSA appears to have become too bureaucratic and has lost the OVERALL plot. There is still time to reconsider.

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