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Commission commotion

Matt Goodburn looks at the reaction to NU’s 20% indemnity commission offer

Norwich Union’s decision to overhaul its commission structure radically has shaken up the industry.

From July 31, NU will pay intermediaries 20 per cent of the first year’s contributions as indemnity commission in a bid to expand its UK retail fund business from 3 per cent to 5 per cent by 2009. There is no further commission payment for the next three years and commission reverts to being fund-based. Clawback will be in place for the first five years.

Norwich Union says the offer, which is only available on regular-contribution business, is meant to encourage small and medium-sized investors to save more money on a regular basis.

Earlier this year, Sterling introduced a similar commission structure on one of its premium Isa products, offering commission of up to 24 per cent. Some IFAs believe that the change would be at odds with the FSA’s treating customers fairly initiative because undue emphasis might be put on the product.

Jamieson Financial Management principal Bruce Jamieson says: “NU’s deal is outrageous and unethical. It cannot be in the client’s best interest to have this sort of scheme. Three per cent is normally the maximum I would take in commission and, with this type of commission, some IFAs might look purely at funds that are offering the most commission.”

Cazalet Consulting principal Ned Cazalet believes NU is purely aiming to grow market share. He believes other life and pension firms will take a close look and some may follow suit.

He says: “It is no surprise that it is Norwich Union doing this. They have led the charge for keeping commission high in life and pensions and a broker’s cash in pocket will influence business decisions.

“We believe the current distribution model is wrong and that it is unsustainable. NU has made a judgement that this will gain them market share, as it has done for them in the life and pension sector.

“We may see a life and pension company celebrity death match for retail fund market share as others may feel that if they do not respond in kind, NU will grab all the business.

“How can an IFA remain independent if NU are jacking up the commission? I believe there is an absolute correlation between commission levels ands sales levels.”

Bestinvest head of communications Justin Modray says his firm is against indemnity commission and believes that by offering such a big up-front commission, IFAs are being offered too big an incentive to push what may be inappropriate funds for some clients’ portfolios.

He says: “Indemnity fees have been a cause of misselling in the past. Norwich Union has some very good funds but no group is good across the board. There is a worry that IFAs might just go to them at the expense of other funds.”

Modray believes that if the whole industry moved across to indemnity commission, it might be fairer.

However, he says: “The one saving grace of this type of commission is that the adviser can afford to give advice to a small investor who may otherwise be overlooked.

“There is no money in an adviser giving advice on a small investment such as 50 a month. Most fund groups are going to be against the concept but the clawback hits the IFA and not the client so that gives a degree of comfort.”

Norwich Union sales director John Clougherty brushes off concerns about the new commission structure and says the 20 per cent up-front payment will mean that many small and medium-sized investors will get better advice from IFAs as a consequence and more consumers will save regularly.

He says: “The market has completely failed to grow regular investments. People forget that in the collective assets market, 97 per cent of all investments into the UK marketplace are lump sum. It is not commercially viable for brokers that charge by the hour to talk to most investors and this will enable a lot of them to do so.”

Clougherty believes that some of the negative sentiment towards the initiative comes from the fact that NU is a big firm with deep pockets.

He says: “People will not like it because Norwich Union is a big firm. We have 10.5 million people who trust the NU brand. No one has to keep the 20 per cent. The IFA is entitled to come to an arrangement with the client and share some of the indemnity commission so this is simply another commission option. The existing commission structure will remain in place.”

Clougherty is keen to stress NU’s corporate social responsibility credentials and says that at every stage, the firm’s TCF committee has been fully involved.

He says: “I think it is critical that we have a very powerful TCF committee that would not let not let us launch this structure if it was not happy with it. Equally, the IFAs we discussed it with were positive. We also discussed it at length with the FSA, who are OL with it because it does not alter the client’s fees.”

Clougherty dismisses fears that customer service levels will suffer. He says: “We will switch on the trail at year three so there will still be an ongoing need for the IFA to service the client.”

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