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IFAs may be casualties in endowment price war

CGU&#39s move to slash commission on its mortgage endowment by over 50 per

cent has sparked fears among IFAs that other insurers will follow suit.

Commission rates for CGU&#39s Homemaker Plus pro-duct are being cut from

62.25 per cent of Lautro rates to 29.15 per cent.

The industry is waiting to see the effect that the reduction will have on

the proportion of CGU endowments sold through IFAs. It could herald the

start of a trend among endowment providers.

Legal & General is in the process of cutting commission on its product

from 100 to 90 per cent of Lautro rates.

Both CGU and L&G point out that the cuts should come as no surprise to

IFAs as they are being made at the end of an ongoing period of consultation

within the industry.

Last November, the Faculty of Actuaries published rec-ommendations that

charges should be kept low so that projections stay within the 6 per cent

stipulated by the FSA.

Scottish Amicable repriced its Home Purchaser endowment from mid-December

although it did not alter the commission of 100 per cent of Lautro rates.

ScotAm head of development (investment) Hugh McKee says: “What the Faculty

of Actuaries&#39 report looks at is reduction in yield and measuring what the

product provider takes by way of charges. What it did not really focus on

was what they do with those charges. Cutting commission does not

necessarily mean making the product any cheaper for consumers.”

CGU says it cut premiums on its product in February but has held off

reducing commission until June to supp-ort IFAs. It claims it has

sub-sidised commission ratesthroughout the transitionalperiod with savings

in operational costs.

Some argue that commission cuts will lead to advisers feeling they are

being penalised as lenders battle for market dominance by attacking

margins. Consequently, they steer clear of endowments which have

dramatically cut commission rates.

Riach Independent Financial Advisers proprietor Bob Riach says: “Many

lenders have felt the need to withdraw from the market but those which stay

look to intermediaries to subsidise their presence.

“With an endowment, the clients have already read the sensationalist

headlines in the national press. So, if an endowment is suitable for a

client, it takes longer to explain.”

But it has been suggested that falling commission rates could mean a

renaissance for the ailing endowment market.

L&G PR manager (housing) Peter Timberlake says: “What we have with

endowments is a benchmark in the sand with the Institute of Actuaries

report. It basically says if your endowment product falls within set

criteria, then it becomes acceptable.”

Alternatively, some believe falling commission could be the final nail in

the coffin of the endowment mortgage.

The Mortgage Operation marketing director Josh Cooper says: “There is a

question of whether this will breathe new salvation into endowments or

whether it will be the end of the line for them.”

But for IFAs there appears to be clear alternative to endowments for those

clients seeking a mortgage with an investment element – the Isa mortgage.

Riach says: “If a price war does kick off, then IFAs will turn to Isa

mortgages. L&G&#39s Isa-linked mortgage looks like an endowment with

flexibility and is classified along with endowments on The Exchange&#39s

trading platform.”

Town and Country senior manager of mortgages Patrick Bunton says: “The

change is good news and has been a long time coming. Since 1987, we have

been directing clients looking for an investmentelement to their mortgage

to Pep or Isa products.”

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