I keep hearing people in the industry saying that “we accept major change has to take place
” Why? I am the first to believe that if we can get to an improvement on current arrangements, then we should do that. But why do we have to have change for its own sake?
We currently have a situation where IFAs can charge fees if they and their clients want that solution to paying for the IFA service. It appears that only about 10 per cent of business with IFAs is done in this way. The other 90 per cent is done on a commission basis.
This means, effectively, that the cost of the IFA service to most clients is bundled into the product. Many clients, including wealthy clients, are happy with this.
The FSA's defined-payment system proposals said that IFAs could not be “independent” without putting themselves on a fee basis. However, they could continue to receive commission and offset fees against commission so that most clients would not pay anything at all.
Our answer to that was why not keep on the menu of options a commission-only route for clients who do not even want to discuss fees?
We must not, of course, forget that “independent” has very little to do with fee-charging, it is more about the spread of companies and products from which IFAs draw recommendations.
Now Sandler has said that we ought to take a further step from the DPS and remove commission altogether.
This means that there can be no commission offset and the IFA and the client have to sort out the remuneration for the advice between them.
I have raised the question in one or two quarters of whether life offices could assist by laying down a “standard mark-up” but I am told that this could be seen as anti-competitive.
So the IFA has to work out the “mark-up” and then persuade the client to pay it.
Here, of course, we could have a range of options – back to the menu. But one of those options would not be a commission-only route. We could invent something like it, an instalment plan, but there is a big question here whether paying that overtly to the IFA would be seen by consumers as equivalent to commission which is bundled into premiums.
We now come to the cost-benefit analysis which Aifa has published. I can see that some cost savings could be achieved between the DPS and the Sandler approach. But it is interesting that an eventual saving of £95m seems to be related to the abolition of commission (that is, no product bias or producer bias).
Is this a suggestion that IFA recommendations to clients are currently biased – it looks like it to me.
On the purely operational costs, we could save a great deal by leaving matters as they are, with a simple requirement on IFAs to tell their clients that the business can be done on a fee basis if they wish and to offer a menu of fee and commission options.
Most clients would probably stick with the commission arrangement if offered that choice but an approach of this kind would allow a continued migration to fees if that is what everyone wants.
Finally, I have to ask the question – what is so great about fees? We are not yet into the debate about excessive fees or excessive mark-ups but I feel sure it will come.
Probably the answer that many people will offer is to let market forces work. But market forces are notoriously difficult to get going in this area.
If IFAs have not read Sandler, they should look at paragraphs 10.59 to 10.71 if they read nothing else. This is the message that we are giving to our 13,000 IFA members.If they do not respond now,the argument will effectively be conceded to the Sandler supporters.
Head of public affairs,
Life Insurance Association Chorleywood,Hertfordshire