Commission mission

Scottish Life sales director Jim Smith considers that the ABI’s recent commission message has been misunderstood.

The recent paper from the Association of British Insurers on Financial Advice: How Should We Pay For It? generated a great deal of media coverage, much of it negative. Most of the initial articles focused on the proposal to change commission options, prompting headlines such as, ABI wants to scrap indemnity commission.

Overall, the ABI is not saying commission is bad. It is simply recognising the reality that we need to consider improving the current situation so payment structures are clearer and easier for the consumer to understand.

This would play an important part in helping to restore confidence in the industry and gaining more positive coverage in the media. These are issues of critical importance to advisers and providers.

Far from being a withering attack, the ABI’s paper takes a balanced view on commission and the place it should continue to have in the market.

For instance, it states that not only is there no evidence that commission induces advisers to sell inappropriately but also that replacing commission with fees would “jeopardise access to advice for middle and lower-income consumers without clear accompanying benefits”.

Encouraging words – but from some of the coverage that the report received you would assume the ABI was staunchly anti-commission.

The report also had some very interesting – and important – things to say on independent advice. In the ABI’s view, a reduction in the UK’s capacity to deliver independent advice would be “bad for product providers and, more important, bad for consumers, who would face reduced access and poorer competition and choice”.

This is crucial. Companies which are totally committed to the IFA and whole of market sector cannot – and will not – support any proposals which would potentially cause serious damage to this sector.

Again, the ABI does not appear to be championing the scrapping of commission – in fact, its paper highlights the huge part it plays in our industry. More than 90 per cent of single-premium and 80 per cent of regular-premium savings products sold by IFAs attract commission.

It would be extremely risky to make significant chan-ges to the current model at a time when the Govern-ment and the industry are agreed on the need to boost the current levels of provision for retirement and for protection.

This is not to say that the existing pension commission structures are perfect. Clearly, they are not.

One of the main problems is that the method of recouping the cost of the advice is restricted by the 1 per cent stakeholder cap. This has the effect of reducing the amount of commission a provider can pay to an adviser and it also puts a level of risk on providers, as they must keep the business in force for a relatively long period of time for it to become profitable.

The policyholder may be seen as the winner here but, in reality, the 1 per cent model only rewards those who want the flexibility to move their funds around without any cost. An up-front charge to cover the cost of advice, with lower ongoing charges through the policy term, can provide better value to the individual who stays with the pro-vider for the longer term.

Recognition of this point offers an insight into how the commission issues highlighted by the ABI paper can be satisfactorily resolved. To achieve this, we need to have a win-win-win situation. The policyholder, adviser and provider must each achieve a desirable outcome.

This might appear to be an impossible goal but new models already exist which offer the best of both worlds to advisers and their clients. They can have the transparency and simplicity of the fee-based approach as well as the tax efficiency (for pension plans) and practicality of commission payments.

These models allow advisers to agree the level of remuneration with their client, as with a fee, but with payment coming from the product.

If the main message from the ABI is that we need new innovative commission models which allow advice to be delivered across the whole of the market, then the answer may already be available – and it is an answer which will enable advisers to manage the transition painlessly to the more positive new environment that we all want.

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