The very strange decision to allow commission to continue to be paid on non-advised annuity sales whilst banning it for advice under the RDR is looking even more bonkers given this week’s Financial Services Consumer Panel report.
There are two arguments usually given to support the unlevel playing field which now exists between advised and non-advised annuities.
The first is that the RDR commission ban was designed to combat the potential for biased advice but where no advice is being given there is not the same potential for bias.
The second is that banning commission for non-advised annuity sales would “rock the boat” too much at a time when few firms are willing to service those with small pension pots.
The FSCP’s findings show large variations in the levels of commission on offer to non-advised brokers. A potential for bias appears to be very much there. (Remember the regulator pushed ahead with the RDR commission ban on advice without finding evidence of significant bias- just the potential for it to occur).
The failure to create a level playing field between advised and non-advised annuity sales is inevitably leading to a distorted market. We’ve spoken to many advice firms over the past year or so who have set up or are looking to set up non-advised arms for retirement business.
The ability to continue to receive commission and lower regulatory overheads make it an attractive proposition- especially for clients with smaller pots where getting full independent advice may not be economical.
Some non-advised firms are offering a decent service to clients who for whatever reason do not want to pay for advice. But the different charging regimes inevitably open the door to regulatory arbitrage and the potential for decisions to be influenced by the higher profit margins available.
One broker shared with the Consumer Panel a model outlining the profitability of non-advised Vs advised business. It more than doubles on a £100,000 pot if the enhanced quote is non-advised (see graph).
Higher margins for distributors can lead to significant disadvantages for the consumer. Alongside less Financial Ombudsman Service protection, savers may not be offered important advice needed to make an informed decision.
A key question that may not be asked is whether an annuity is the right solution at all. With complex annuity solutions, such as fixed-term and investment linked, becoming more prevalent, the risk of these types of product being “mis-bought” on a non-advised basis will only increase.
The “rocking the boat” argument does not stand up either. People aren’t getting a “free” service at the moment, unfortunately many think they are.
Money Marketing, alongside others in the media, has been pressurising firms to amend marketing which have promoted these services as free but more needs to be done.
A ban on commission should be introduced as part of a package of annuity market reforms, including mandating the use of an independent broker (proposed by Labour but rejected by the Government) and promoting higher standards.
The other alternative is the horrendously named National Default Annuities Service, suggested by the Financial Services Consumer Panel, and the inevitable inefficiencies and bloated costs that are likely to accompany a Government-led project. A market (and regulatory) led solution based on higher standards and more transparency is a far more attractive proposal.
You get the feeling that the FCA’s current review of annuities will come up with some bold conclusions. And it needs to.
At present it seems mad that the regulatory dice are loaded so much against independent advice and in favour of a way of doing things that risks so much consumer detriment.
Paul McMillan is group editor at Money Marketing – follow him on twitter here