View more on these topics

Factoring factors

Do you remember that one of the five work streams set up when the retail distribution review was launched in 2006 was about customer access? The FSA has realised that raising the quality of advice would increase the cost, pushing it out of some people’s reach.

As we await this month’s RDR consultation paper, the FSA’s plans to ensure the RDR improves access to advice remain, frankly, obscure.

One way it could help is by abandoning its proposal to ban providers from helping consumers pay for advice by “factoring” – or spreading – the cost over time. The altern-ative is matching, where pay-ments to advisers, and charges taken from customer policies to pay for advice costs, have to exactly coincide. Matching would not always be a problem. The cashflows can be aligned in bigger lump-sum cases.

The issue comes with initial advice on modest regular savings. You only need to think about how to pay, say, £500 for initial advice out of a £100 a month regular savings plan. The factoring debate centres around five key arguments. You can see the FSA’s potential objections but each one seems to have a credible answer.

Argument one: the regular savings market is small and declining. The industry is not interested in this business. Association of British Insurers statistics show that in pensions alone, individual regular-premium business was over £1bn in 2008 and surely the aim should be to reverse, not accelerate, any decline? Of course, group pensions (which are currently out of scope) are another £2bn.

Argument two: factoring would perpetuate provider bias. The ABI has proposed a model that standardises factoring across providers. There would be a maximum period over which payments could be spread, say five years, and a standard discount rate.

Argument three: standard factoring is anti-competitive. This needs proper debate involving the OFT. Competit-ion policy is designed to deli-ver good outcomes for consu-mers. Surely standard factor-ing terms, which would focus competition on under-lying product price and quality, are a better outcome than a smal-ler advice market or less saving.

Argument four: factoring will be too complicated for consumers. Again, this demands creative debate. Work we have done at Aegon suggests that, compared with the overall challenge of presenting adviser charging, adding factoring in some cases is not a show-stopper.

Argument five: factoring would take firms into cons-umer credit territory. Unhelp-fully, this might put some firms off offering factoring. But given the potential cons-umer benefits of wider access to advice, surely it is worth airing the risks in search of pragmatic design solutions?

I am not saying that factor-ing for regular savings is the complete answer to access or that the arguments against factoring are wholly without merit but it would be a brave regulator to ban it with so many arguments unresolved.

Francis McGee is head of corporate affairs at Aegon

Recommended

Axa Life calls for RDR clarity

Axa Life is calling on the FSA to provide details of how it plans to deal with advice gaps that could arise due to the changes brought in by the retail distribution review.

2

FSA won’t release legal advice over long stop

The FSA has refused to release details of legal advice it received over the 15-year long stop, arguing that it could be used against the Financial Ombudsman Service in any future judicial review.In April, the regulator conducted an internal review of its decision to deny a freedom of information request for the FSA legal counsel’s […]

IFA support for flexible annuity products grows

A total of 73 per cent of advisers believe that flexible annuity products offer a valid alternative to conventional annuities and income drawdown, according to Lincoln Financial Group research.The figure compares with 55 per cent in 2007, when the firm conducted the same survey among 200 advisers.According to Lincoln’s research, 12 per cent of advisers […]

A DGT with 100% access and 100% discount?

Clare Moffat, Technical Manager, looks at the benefits of pensions from an IHT perspective. 100% access and 100% discount – what type of wrapper could this be? A pension! Post flexibility there is 100% access (for those over 55) and normally pensions are inheritance tax (IHT) free. With flexibility the options available on death mean […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment