Two hours later, I received another in a similar vein, followed by a third pointing out the connection – according to the emailer – between Axa’s decision and the looming (or should it be lumbering?) introduction of the retail distribution review.
Whenever you get a few emails from IFAs on any topic it always makes sense to do a bit of research. And so, in recent days, I have spent some time trying to decide whether my first correspondent’s email reflects any kind of reality or whether it is wildly optimistic.
After several hours on the internet and on the phone, my own feeling is that such comments are a triumph of hope over experience.
Let’s look at the background. First, as far back as last summer, a number of insurers have been signalling a move away from commission-based remuneration on GPP arrangements.
Friends Provident was among those foreshadowing Axa’s decision, along with Prudential, Clerical Medical and Standard Life.
At that stage, only Norwich Union, Axa, Aegon Scottish Equitable and Scottish Widows remained as commission-paying providers in the GPP market and even Widows introduced retrospective clawback on all single-premium and transfer payments into its GPP policies.
So the idea that Axa’s decision reflected something new is inaccurate.
The second key question that needs to be asked is why has the decision been taken by most of the key GPP providers to move to a different remuneration arrangement? Again, this is only my opinion, but my gut instinct is that indemnity-commission- based GPP products are an anomaly almost like no other in the market.
The reality is that if you are discussing setting up a GPP, the idea of a commission-based advisory service only works if you can get agreement from an employer that you should be remunerated in that way.
Increasingly – and especially with the looming introduction of personal accounts in 2012 – what is happening is new contracts do not allow for enough up-front charges to be levied to meet set-up costs. In turn, this means fees become the only realistic option for IFAs operating in this arena.
Moreover, for the majority of IFAs, the GPP market is a closed book. I do not have figures to hand and I’m happy to be corrected, but I am willing to bet that less than a third of financial advisers set up more than two or three GPP schemes a year, if that.
Are there any other reasons for a move away from commission? One reason advanced by some observers is that it reflects what kind of GPP market some of the key players are keen to move away from – in other words, stop competing in the small GPP market and leave it to commission-hungry IFAs, while focusing on bigger schemes where fees are more likely to be the main form of remuneration anyway.
Second, what is interesting about Widows’ clawback decision is that it highlights a major concern among many providers for some time, the problem of churning. Last year, a number of providers privately admitted that this was an issue, including Friends Provident. By removing commission as a factor in the IFA overall business strategy, you reduce the risk of churning.
But just because it makes sense to move towards fees in respect of GPPs does not mean it is a worthwhile strategy for providers’ other products. Here, it is likely that IFAs will continue to demand and receive commission as the main form of remuneration.
It might be by means of “matched” charges, as set out in the RDR proposals – what a ridiculous attempt to pretend that commission is being supplanted by something else – but the fact is that it will still be commission in all but name. All change means no change.
Which is why to talk of this move by Axa as representing the beginning of the end for commission is plain wrong. Not only does the company’s decision simply make it the Johnny-come-lately among providers, it is also unlikely to have any tangible effect on the way IFAs are paid for the bulk of the remaining advice they give.
Now, those of you reading this may well think that is a good thing. I think what it does is show yet another area where the RDR is failing to have any impact.
Last week, it was reported that Otto Thoresen, chief executive at Aegon UK and author of a review of generic financial advice, criticised the RDR for failing to offer anything to less-well-off consumers. It seems that his report has effectively been decoupled from the distribution review and will be allowed to die quietly.
As it happens, it is not just Thoresen’s review that is dead and buried, but any hope that the RDR might have offered something new and inspiring to millions of tired and fed-up consumers.
Nic Cicutti can be contacted at Nic@inspiredmoney.co.uk