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Does protection commission need a shake-up?


The protection industry is facing calls to review commission structures following radical cuts to upfront rates in Australia.

In June, proposals were published in Australia to cap upfront commission on protection products at 60 per cent of the first year’s premium from July 2018, down from as high as 120 per cent.

Maximum ongoing commission will be set at 20 per cent of the premium from January 2016, while three-year clawback periods will apply.

The proposals follow a review of life insurance advice published in October, which found a correlation between upfront commission models and high policy lapse rates.

Now there are concerns that consumer groups may push for similar changes in the UK, where upfront commission is typically 150-200 per cent of the first year’s premium.

Ongoing commission is significantly below the Australian limit, however, at 2-3 per cent. Some advisers also choose to work on a non-indemnified basis where commission is paid over the course of the product, while clawback periods are either two or four years.

Protection Review chief executive Kevin Carr says a cap on upfront commission would be a “game changer” for the UK market.

He says: “With protection all of the work is done at the outset, so there is a sound argument for commission to be paid upfront.

“But commission is a tainted word and to the average man on the street it implies some kind of misselling.”

In 2010 the FSA concluded that protection should be exempt from adviser charging under the RDR, as it could find no evidence that commission caused consumer detriment.

Many also argue that were commission on protection to be cut or scrapped, product sales would fall dramatically, leaving fewer consumers protected.

Fairer Finance managing director James Daley says: “I have sympathy with the view that without commission even fewer people would have protection, but I am instinctively wary of anything being sold with commission in financial services.

“On so many occasions advisers have acted in their own best interests and sold what makes them the most commission, rather than acting in the best interests of the consumer. The early signs are that the RDR has been successful in eliminating product bias, and I find it hard to believe that there are not advisers out there selling protection products to maximise commission.”

He says the commission paid to comparison websites for protection is also a concern.

“They are taking adviser style commission but in most cases are not giving advice. That is quite alarming.”

A spokeswoman for the FCA Consumer Panel says: “Inducements such as commission frequently present a significant risk of conflicts of interest by incentivising an intermediary to pursue the sale of inappropriate products for their own benefit but to the detriment of the customer.”

Plan Money director Peter Chadborn says protection remuneration is not proportionate to the amount of work involved.


He says: “The commission is based on the premium, so I could arrange a £200 a month term assurance for someone in good health which involves little work, but pays a significant amount of commission.

“My next client might only need £30 a month worth of cover and be in poor health, so the commission does not cover the amount of work involved.

“Where the remuneration is disproportionate to the work, there is the potential for it to lead to poor practice.”

Others argue that having such high upfront commission may not be in the best interests of consumers.

Zurich head of regulatory developments Matt Connell says: “There is an argument to say the higher the upfront commission, the more you encourage advisers to move customers from one provider to another. But on the other hand, if you don’t pay enough upfront commission, fewer customers will be protected.”

But experts say paying fees or commission relative to the amount of work involved could breach treating customers fairly principles.

Carr says: “That would mean those with a medical history would pay more – at what point does that become unfair?”

LV= head of protection sales Mike Farrell says: “It doesn’t follow that upfront commission leads to a poor consumer outcome. Reasonable levels of commission allow successful businesses to prosper and serve consumers well.”

Master Adviser partner Roy McLoughlin says: “I do not see the issue with upfront commission, as long as the business stays on the books.

“The protection market does not have the same consumer detriment issues that existed in pensions and investments pre-RDR. For instance, it is very difficult to over-insure a customer.

“The protection market has enough problems as it is and tinkering with how it is paid will only create more issues.”

Most say moving to a three-year clawback period would not have a major impact on the UK market, and that clawback periods incentivise advisers to write business which is more likely to stay in place for longer.

Daley says: “We want people to buy policies that are affordable and that meet their needs. We don’t want to incentivise advisers to sell any old policy and not care if it lapses.”

Connell says while the intention of clawback periods is to encourage advisers to write business that stays on the books, there may be adverse affects.

He says: “There may be a situation, for example, if rates go down, where it is in the customer’s best interests to switch products before the clawback period finishes.

“The regulator may question whether customers are being moved at a time that is right for them, or a time that is right for the adviser.”



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. If we ignore PPI, which was miss-sold by the banks and credit companies, then we see no evidence of any miss-selling of protection products.

    This is backed up by FOS complaints figures which are infinitesimal compared to other products.

    Protection is sold and unless the premiums are very high there is little scope for a fee-based approach.

    In short, the sector should be left alone otherwise it will wither and die and the protection gap will hit £5 trillion. I guess on that basis the bureuacrats will get stuck in

  2. A pre-emptive solution would be for distributers to take responsibility for propositions. They would be rewarded by sharing more deeply in the value chain and have the potential to provide improved outcomes for customers.

  3. Tony, Would you care to expand on what you mean, perhaps with examples in plain English? I can usually understand consultant speak quite well but you have lost me.

  4. Interesting article, which raises several points:
    1. Who is making the calls for the UK to review our commission structures and do they realise there’s a big difference in the UK market compared to Australia?
    2. In Australia, the upfront commission imbalance creates a much worse situation all round than we have in the UK, because their protection market is based primarily around renewable premium contracts (or as they call it, stepped premiums). So at renewal, the premium would always be going up due to increase in age, and as with car insurance at renewal, no doubt there is the economic pressure to offer cut-throat low new business rates compared to much higher rates for non-switching existing customers. That, combined with high initial commission, and what do you get? Obviously, massive churn rates, poor product profitablity and existing customers subsidising active switchers, and everyone funding advisers to carry out a switching activity which is only necessary because new and existing customer premium bases are out of balance.
    3. In the Australian example, the proposals for change were put forward primarily by insurers claiming a win for consumers, whereas the main winner is insurer balance sheets.
    4. In the UK we do have reason to look at protection commission, but our biggest issues are:
    firstly, the unfairness around treatment of COBS advisers dealing with protection compared to the price comparison sites, and
    secondly, the extent of the disparity of commission rates as illustrated above.
    These two factors are signs of a market which which has bidding for distribution as the highest competitive factor, well ahead of consumer outcomes and product / service quality.

  5. Leave the Protection area alone, why Tessa Norman do you see the need to start rocking this boat, pick on Supermarket cartels or suchlike.

  6. @Ruth GIlbert and others.

    East solution that should have been adopted at the outset of RDR. ALL commission should be banned. That should solve a load of problems. Don’t forget that CAR would be still allowed, but from what I have seen this would not suit protection advisers as they seem to be somewhat coy about the amount they trouser.

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