Almost exactly a year ago, the financial services industry found itself compared with the gas and electricity retail market by FSA chairman Sir Callum McCarthy. In his speech at the Gleneagles Savings and Pensions Industry Leaders’ Summit, McCarthy recalled how salespeople on commission in the energy sector were essentially offered incentives to missell contracts.
He said: “Originally, all the energy companies paid their salesforces against signed contracts to buy gas and electricity, with the result that there were numerous abuses – forged signatures, signatures from children and incorrect claims of the savings from benefits and disputed contracts.”
McCarthy, a former executive chairman of the Office of Gas and Electricity Markets between 2000 and 2003, said incentives change behaviour and this could also apply to financial advice.
He said: “At present, it is clear that the way in which firms are managed when the commission model applies frequently fails to mitigate these high risks of inappropriate advisory and transactional activities taking place.”
But how fair was the analogy with the energy market? Twelve months on, many advisers still find the comparison demeaning and fail to see how it is relevant to the FSA’s pursuit of the commission incentive in financial services.
Pharon IFA director Nick O’Shea says: “It is like comparing apples and oranges. The financial services industry is more tightly regulated and has a more professional workforce. Direct salesforces have been nearly eliminated in financial services whereas they are commonplace in the energy sector.
“The energy sector is probably 15 years behind financial services. It has a huge amount to learn from us, not the other way round.”
Wealth and Tax Management financial planning director Tony Byrne says: “It is a completely outrageous and demeaning comparison. How on earth can you compare financial services with the power industry? Financial services is very competitive and has cleaned up its act dramatically in the last 10 or 20 years. It is one of the most regulated professions.
“The energy market is unregulated and its salesmen can be misleading, failing to make full disclosure and not providing what they promised. Supplying a product, gas or electricity, is hardly the same as professional financial advice. Energy companies are just administrators issuing invoices.”
Consumer group Energywatch says the inappropriate selling of gas and electricity was partly the consequence of deregulation as energy companies rushed to gain market share.
It says incidents of misselling in the energy market were at their highest between 1999 and 2003, peaking at 14,328 in 2002-03. But complaints fell sharply to 6,453 in 2003-04, 1,926 in 2004-05, and 1,471 in 2005-06. From April to September 2006, complaints stood at just 588.
In his speech, McCarthy suggested the decline in energy misselling was due to changes to the payment model for salespeople.
He said: “Eventually, and with some regulatory encouragement, all the energy companies changed to paying commission against signed contracts only after they had been subsequently confirmed by the customer and abuses essentially stopped – not because door-to-door salesmen and women had become more ethical but because it was not profitable to cheat.”
Energywatch director of campaigns Adam Scorer believes commission can encourage malpractice but he says the problems in the energy market were also related to deregulation.
He says: “It was a land grab. Energy companies looking to enrol customers outsourced selling to highly motivated salespeople who worked almost entirely on commission. If you only have commission, you are asking for trouble.”
Despite its suspicion of the commission model, Energywatch stops short of calling for its removal from the energy market. Scorer says: “We do not see that commission needs to be removed altogether.”
Ofgem head of media relations Mark Wiltsher says: “It was the first time that energy competition had been introduced anywhere in the world, so it was a young market. Obviously, with anything new, you are going to learn lessons.”
The Energy Retail Association says it was not commission itself that was the problem, the issue was with the sales cultures present in some companies.
Code manager David Laird says: “Commission was not the major driver of misselling. I think that has been disproven. You have to look at the way sales teams were managed.”
Ofgem says the fall in complaints was the result of a combination of its own actions and stricter self-regulation by the industry, rather than specific moves against incentives such as commission.
In April 2002, the regulator was given the power to fine companies. In October that year, it issued a landmark £2m fine against London Electricity concerning Virgin Energy salespeople misselling gas and electricity. Wiltsher says: “You then saw a steady fall in complaints.”
The number of complaints has fallen both in the energy and financial services markets in recent years but only one regulator still has an issue with commission. Unlike the FSA, Ofgem says there are no plans to restrict the use of commission in the energy market.
Wiltsher says: “Misselling is no longer a significant problem so we have no plans to replace commission. It is up to the companies. We do not micromanage them. We set down certain standards and it is up to them to run their own company.”