As new disclosure rules bring the full extent of protection commissions into the spotlight, experts are asking if this will see clients ditch their advisers in favour of execution-only services.
Under the Insurance Distribution Directive, from 1 October advisers have had to provide clients with information before a product sale about any commission received, which should include up-front and ongoing costs. Where necessary, this must also be done when a policy is either renewed or updated.
While protection remained the one area of advice immune from the RDR’s commission ban, the IDD effectively mandates charges for protection are split out in a clearer way between all types of remuneration in line with what the RDR enforced on investment and pensions advice.
The IDD gives EU members the flexibility, if they want, to go further on the commission rules and restrict any commissions or fees from third parties for insurance advice, meaning the FCA could, if it chooses, tighten the rules further.
A senior protection industry source says: “The fact you have to visibly disclose could cause advisers trouble. Clients might notice that they are now being charged hundreds of pounds for a phone call.
“If the IDD makes disclosure obvious, what is the value of the advice and the commission?”
The source adds that unearned indemnity commission is a topic that has arisen in meetings with the FCA.
Some would see this as a negative development in the market.
One protection expert tells Money Marketing that while they may look cheaper, some execution-only sites actually take more commission than advisers do.
Chapters Financial director Keith Churchouse believes there is unlikely to be a significant drop-off in advised sales, however.
He says: “Many clients do not identify the need for protection or quantify it. It is those two elements where the adviser normally creates an opportunity for a protection plan.
“I would think it would be very rare for a client, say a director of a company, to protect themselves or their business, working out a sum assured and then handling the market. They have got better things to do than that.
“For someone who is green, researching the market for the first time, they may find that quite difficult and time-consuming.”
Churchouse adds: “I can see a price-point argument but that would be very limited. I don’t see a flood away from advisers at all.
“Many online services do offer good value, no doubt about that, but many people do not buy protection or identify it as a need. You don’t normally get clients taking advice then heading off to a third party to execute the deal.”
Bridging the gap
If there is a shift to self-service, referral to execution-only sites may not necessarily leave the adviser worse off.
Protection Review’s Kevin Carr notes that execution-only does not necessarily mean no commission, and that most execution-only sites do facilitate payments.
He says: “Advisers can of course reduce the commission by any amount down to zero and charge a fee instead, and some advisers already partner with execution-only firms if that is what the client prefers.”
In a letter to members of Kent-based adviser network Julian Harris, seen by Money Marketing, the firm advertises a new referral service to an execution-only protection site for advised clients.
It says it is targeted at advisers “who would rather not advise clients on protection but would still like to receive the commission”.
Advisers direct clients to the site where they can get a quote from a range of eight different providers, listing the adviser as their introducer, who would then receive their commission.
The letter says that the introductory commission rate would be between 118 and 132 per cent of annual premium depending on the insurance company.
Commission is subject to an up-front cap of £350 per plan, with the balance held until the end of the indemnity period.
Advisers are provided with a template letter they can show clients when referring them to the self-directed service, notifying them that it “selects from a limited number of providers, and hence you may be able to obtain a more competitive quote elsewhere”.
The suggested letter adds: “I am not giving you any advice in respect of your protection needs or possible solutions, hence if you want advice in connection with your protection needs and possible solutions, you should contact an authorised adviser who is willing to advise you in this area.”
Churchouse says advisers should be clear about where advice starts and ends.
He adds: “It can still be advice if the adviser is making a recommendation to a third party or a recommendation which the third party then uses.
“It might be execution-only with a small ‘e’, as it were, because advisers are still probably providing advice on what they should be looking at.”