The ABI looks as if it is trying to steal Ron Sandler's thunder by working on proposals for a new disclosure regime based on benchmarked commission.
A working party is being set up amid suggestions that commission offered by various providers on the same product could be disclosed, perhaps alongside an industry average or benchmark.
In effect, this benchmark could be viewed as a recommended price for commission and has been met with mixed reactions by the industry. While life offices and IFAs welcome improvements to disclosure, they are not convinced the answer is this simple.
Clerical Medical pensions strategy manager Nigel Stammers says: “The ABI is looking at options as to how to find a middle path. Rather than having an official maximum commission agreement imposed upon us, a benchmark could work as an industry-agreed one. It might temper the excesses of some providers.”
But IFA Wentworth Rose managing director Philip Rose says: “One problem with a benchmark is that it suggests that anything which pays commission below the benchmark is good value when, really, commission is only one of many charges. A product may come out with half the commission of the benchmark but the plan itself could be lousy.”
Rose thinks a total expense ratio which shows the effects of all a product's charges would be more appropriate than a benchmark based on commission.
Scottish Life head of communications Alasdair Buchanan believes that commission benchmarks will make IFAs look inefficient if they recommend products priced above the benchmark as this will not reflect the amount of work undertaken in selecting and recommending the product.
Another problem is that using benchmarks is not always practical in an industry with such a tangled web of products. Questions to be addressed include how a benchmark is arrived at and which products should be benchmarked.
Rose says: “The danger with benchmarks is they become easily outdated as products and servicing requirements change. They tend to stultify a system and set details in stone in what should be a dynamic and changing environment.”
The ABI intends to design a point-of-sale document which explains what commission pays for, that some products attract more commission than others to reflect the complexity of advice and the choice between commission and fees.
Roberts Clark director Ashley Clark suggests: “Like solicitors, you should get a flat fee for certain things. You can charge a fee for any work done above that. Any system where commission is driven by the providers' negotiated remuneration levels will never be transparent. A benchmark can not account for this activity.”
While the ABI says it “must seek to raise the quality of the debate around commission”, many think that more fundamental changes need to be put in place. Scottish Life believes the ABI is approaching the commission debate from the wrong side and that focusing on commission will not address Sandler's concerns.
Buchanan says: “This is really just tinkering with the same problems and not getting at the key issue. We should be looking at this from the advice side and product commission should be incidental.”
Scottish Life suggests that IFAs should agree the cost of their services with each client and then work out how best to pay for those services. Buchanan says: “The client may then pay fees or agree that it may be more cost-effective to pay through commission. This tailors it to the particular situation rather than a product sale.”
Norwich Union also believes that a new commission/fees relationship would be more productive than a benchmark, which it says would be difficult to make meaningful. It suggests developing a scale of fees, with any commission received by the IFA used to offset the cost of fees. Director of marketing Rob Fletcher says: “This sort of model would show how advice is paid for. A benchmark would be useful but it would be difficult to establish on different types of products.”
The ABI says its plans are in the early stages of development but it is clear that it wants to get these proposals off the ground before “the debate moves on to structured options”. Its life insurance committee says the industry should take the initiative in developing proposals for change to pre-empt any alternative regulatory moves and that the timing is critical if it is to sway the outcomes of the Sandler review and FSA's consultation on polarisation.
However, most life offices and IFAs have already submitted their ideas to Sandler. Rose says: “It is difficult to discuss new disclosure regimes when we do not know what shape Sandler wants to take. Only then can we have a second consultation to work out which is the fairest way to go forward.”
With so many ideas for commission on the table, it would seem the ABI's chances of coming up with a solution to dazzle Sandler are pretty slim. But can you fault it for trying?