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Double indemnity

The ABI’s proposals to ditch indemnity commission and overhaul adviser remuneration have shocked IFAs and consumer groups.

Many commentators and industry bodies agree that commission needs reforming if consumers’ perceptions of IFAs are to improve but several have taken issue with the thrust of the ABI’s proposals, which stem from research carried out by consultancy Charles River Associates.

The ABI has also proposed annual commission statements for consumers and equalisation of commission levels across products with similar aims. This is intended to stamp out any product bias, although only limited evidence of bias was found, specifically in the sale of investment bonds versus Isas.

The plan has split IFA bodies and Which? has slated its findings. Aifa has been particularly vocal,citing the fact that CRA found no significant evidence of commission bias as reason not to pursue such reforms.

But the Personal Finance Society broadly agrees with the ABI. It says if commission is not restructured, the perception that advisers are commission-chasers will persist, regardless of evidence to the contrary. Given that CRA did find limited evidence of product bias, the PFS questions why Aifa wants to gloss over this, even if it is not prevalent in the industry.

PFS public affairs director John Ellis says: “We welcome this report. We have been saying for a long time that we have to look at the current commission system because it is not doing us any favours with public perception. The industry is locked in a bit of a time warp. To a large extent, providers have seen IFAs as an extension of their salesforce and remunerated them as such.”

The ABI and CRA are adamant that commission does have a place in the market, particularly if advice is to be accessible to lower-earners but stress that it needs to be more transparent if consumer confidence in the IFA sec- tor is to grow.

Aifa attacked the timing of the proposals with the ABI looking for responses by May 31 – just 24 hours before the payment menu comes into effect. Aifa is adamant that the menu will address many of the concerns raised.

But ABI head of regulation and strategy Francis McGee says while the menu will go some way to making commission more transparent, it could go further. He notes that remuneration structures such as indemnity commission make it very difficult to work out accurate market averages – one of the key aims of the menu.

McGee says: “I am not completely sure about what Aifa’s complaint entails. If all of our proposals were accepted, they would fit with the menu. Depolar-isation and the menu are, by and large, good things but we are saying that more could be done.”

Scottish Life group head of communications Alas-dair Buchanan says there is widespread criticism of commission, although much of it ill-informed, but it is better to look at ways to improve how it is structured than try to convince critics, such as MP John McFall and the Treasury select committee, that they are wrong.

He adds: “I can see why Aifa is not happy but anyone who tries to prove there is no problem is doomed to failure. The industry has to accept that elements of adviser remuneration could be improved. The intermediate stage on indemnity commission is not clear and I can understand IFAs feeling a bit sore with commission being cut on many products.”

He says indemnity commission is an oddity in that it pays in advance and IFAs can switch their clients around once the clawback period is over.

McGee also rejects the criticism on timing, saying that that any firm proposals are at least a year away and will more or less coincide with the FSA’s planned review of how well the menu is working which is due in 18 months.

But herein lies another criticism with Severn saying the ABI is trying to stave off any intervention from the Government led by the Treasury select committee or the FSA. McGee says it is better for the industry to self-regulate but stresses that the Treasury select committee had no hand in the decision to commission the research.

McGee says: “The FSA will formally review the menu in 18 months and I would far rather have an industry debate and proportionate reform before others steam in.”

Severn says: “It certainly has a sniff about it off a knee-jerk reaction to having had a hard time at the Treasury select committee. The menu is a safeguard for consumers and the ABI is not giving it a chance to work.”

Which? senior policy ad-viser Mick McAteer is similarly sceptical. He accepts that annual commission statements are a step in the right direction on transparency but believes it is essential that an outside body, such as the regulator, calls the shots.

McAteer says: “The research is not truly independent and the ABI has a real problem with credibility and legitimacy because of who its sponsors are. It needs outside intervention because the way the ABI handled endowments and contracting out does not fill me with confidence. We are seeing a huge land grab by big insurers and banks which are acting like cattle barons in the Wild West. Depolarisation is also ratcheting commission up.”

Informed Choice managing director Nick Bamford questions the ABI’s motivation, particularly since its members are the ones fuelling commission and devising complex payment structures.


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