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Commission Edge

FRANCIS McGEE

Two truths underlie last week’s publication of new research on commission and the launch of ABI’s consultation on options for change. First, is the fundamental importance of advice to closing Brit-ain’s £27bn savings gap.

Oliver Wyman’s work for the ABI in 2001 proved that. Securing the widest possible access for potential savers to the best-quality, impartial advice is a matter of nat-ional importance. Second, is that the public’s concerns – for some the deeply held belief – that commission undermines the quality and independence of advice will not go away on its own accord.

This debate is very much alive. Even a decade on from the start of the pension review, a decade on from hard commission disclosure under the PIA, five years on from the start of the endowment crisis, three years on from the proposal of the loathed defined-payment system, two-and-a-half years on from Aifa first suggesting the menu and a year on from the FSA lifting the bonnet on precipice bonds. Predictions are difficult.

But I am confident that one, two, three, five, 10 years on from now, the debate will still be going on.

Unless, of course, it has been brought to an abrupt end by the intervention of future generations of regulators, unable to resist any longer the pressure of public opinion.

Or, far better, unless the industry, together with others, has done the work to create support for a better alternative.

Which brings me to four falsehoods. The first is that ABI’s new initiative is all about caving in to criticism from the Trea-sury select committee. Not true. Our work predates the TSC report. It stems from a commonsense analysis of the root causes of low confidence and inadequate saving.

The second falsehood is that we are over-reacting. Readers of last week’s Money Marketing could be forgiven for thinking that the resear-chers found no problems and that the proposed change must be all about providers advancing their self-interest.

But there is evidence of bias. Some 20 per cent of IFAs and 12 per cent of tied advisers showed product bias. There is pro-vider bias too and plain old bad advice. Incid-entally, a panel of practising IFAs drew these conclusions for us.

What is true is that these are minority findings. The commission model is not broken beyond repair. Indeed, commission is the life-blood of much of today’s advice and the choice of most clients. It can and must be defended.

It is also true that, faced with almost identical evidence three years ago, the FSA proposed the DPS – a solution to a pan-channel problem but limited to IFAs. A solution that would have crippled the national infrastructure for giving advice and an indication of what happens if practitioners do not control the commission debate. Now let’s discuss “over-reaction”.

The third falsehood is that our timing is awry, that we must let the menu bed in and that we are creating piles of work for IFAs. But CRAs ideas would not change the maths going into the menu which IFAs download from the web, not the menu itself.

And the proposed new commission statement looks more like work for providers than IFAs. Third, there are always reasons not to raise hard questions. It’s time we not only raised them but also offered answers.

Fourth, our timetable is generous. It will be a year before we have firm proposals for action following this consultation. By then, the FSA will be thinking about reviewing the menu anyway.

The final falsehood is that the CRA suggestions on indemnity are an attack on IFA businesses. This is conspiracy theory gone mad. How would providers’ interests be served by a cashflow squeeze on key distributors that they might not survive? As far as the ABI is concerned, there is no prospect of removing one set of financing arrangements before we identify a robust alternative but the onset of depolarisation is the right time to be asking the question.

With this new initiative, the ABI is aiming between sweeping claims of true and false. We are aiming for reform of the commission system to make it fit for the long term. We are aiming to force the sceptics to look beyond a fee-only world that would cull advice and restrict consumer freedom. We are aiming for a world where transparency allows sensible rebalancing so that the rewards for advice match its value. We will spend much of this year refining the initial proposals. Aifa and IFAs must be part of the debate.

Francis McGee is head of regulation and strategy at the ABI

David Severn

What would you think of your doctor if, after giving you a complete medical check, he concluded that although you were in A1 condition you might nonetheless consider having a limb amputated?

Daft I know, but daftness affects some organisations. In the foreword to the ABI’s report on paying for financial adv-ice we are told that the “debate about commission has been heavy on assertion and depressingly light on data”.

If you then turn to the CRA report you are told: “Based on an extensive mystery shopping exercise and economic evidence from detailed provider information, it was concluded that there was no evidence of a systemic problem of bias.”

Faced with such a finding, which is consistent with the findings of a similar exercise carried out by CRA in 2001 for the FSA, you would have thought any rational org-anisation would leave things alone.

Instead, the ABI concludes that there are no grounds for complacency and a “thorough-going public discussion” is needed. Nice timing too, on the eve of the introduction of the menu.

Obtaining details of a client’s personal and financial circumstances and then recommending a suitable solution to the client’s needs invol-ves a lot of hours work and that work is performed predominantly at the front-end of the relationship, not spread over years.

I have spent many happy hours with my own IFA sorting out my arrangements going forward. It is normal in other fields of economic activity for there to be some reasonable corr-elation between the incidence of costs incurred by a firm in performing work for a customer and payment by that customer.

If a client writes a cheque to his IFA for work done up-front in the relationship no one seems to get exercised about the matter. But the moment commission ent-ers the picture, accu-sations, now shown by the CRA research to be unsubstantiated, fly about of bias. It appears that where the client chooses for his adviser to be remunerated by commission it is thought OK to let the adviser wait for his money.

I think the acid test for the ABI’s ideas is whether it proposes to act on them in paying CRA. I can imagine the ABI telling CRA “thank you my good fellows for all the effort you have put into your report. You may be expecting a fat cheque but instead we propose to pay you by installments over the next 20 years”.

Of course, with any report there are some ideas which are not so daft. The report does show how important it is for IFAs to spell out to clients the nature of the service being provided and how that service will be remunerated. Is the service just for initial advice? Or is the client expecting and the IFA offering ongoing advice and administration? It is these matters that the menu should help to clarify, if only the ABI would give it a chance.

If the ABI’s ideas were carried forward into practice it could spell the death of many small IFA firms. Sure, indemnity commission is a debt and therefore represents a business risk for those trying to build up value within their firm. But faced with rising costs from the FSA’s fees, compensation levies, Ombudsman fees and PI premiums, indemnity commission is a necessity for many firms. Take it away and it probably would be handing victory to the banks.

One can only hope that the Office of Fair Trading, which has been so prominent in seeking to abolish what it perceives as anti-competitive practices elsewhere in the industry, will resp-ond to the ABI’s discussion paper and tell it to stop its nonsense.

The ABI does not say how it would enforce its proposals. At the first sign of strain, wouldn’t one of them offer commission on indemnity terms? And wouldn’t that create the bias which the research tells us we do not have?

David Severn is director general of Aifa

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