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Loaded premiums may have to be disclosed

Protection advisers may have to tell clients if a premium has been loaded following the FSA’s review of oral disclosure requirements.

Money Marketing first exposed industry division over the practice, where premium rates are inflated to pay distributors and advisers higher commission, in August. In November, the FSA ordered all firms selling stand-alone protection policies to review their sales processes and report back in six months after it found firms failing to comply with Icobs rules on oral disclosure. It is understood that loaded premiums is one of the disclosure issues the FSA is looking to address.

Icobs rule 6.4.2 states that firms must tell clients about all of the policy’s main characteristics, including costs.

The rule states: “A policy’s main characteristics include its significant benefits, its significant exclusions and limitations, its duration and price information.”

Advisers working under Icobs are also required to disclose any fees other than the premium or where a fee cannot be given, the basis for calculating fees.

Plan Money director Peter Chadborn says: “Unless you are prepared to disclose whether you are taking loaded premiums or commission, the message you are sending out is that you have something to hide.

“If a distributor has the ability to negotiate good commercial terms, good luck to them but additional costs should not be transferred to the consumer.”

Personal Touch Financial Services sales and marketing director Dev Malle says: “We will not be loading the premiums for our members to get higher commission levels because ultimately we think it is detrimental to the consumer. Our stance is that the practice should be outlawed.”

The FSA and the Association of British Insurers declined to comment.


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. As long as this includes companies like Tescos and Asda and the banks having to disclose the loaded commissions they receive I’m all for it.

    However i thought the bottom line with protection was the cost of the cover? As long as that adviser can provide with the cheapest cover what is the issue?

    Do you get told what the mark up on a tin of beans or a Ford Focus is? No so why is there so much disclosure in our industry?

  2. Interesting – what loaded commission does Tesco receive then?

  3. Scenario – Lets paint a picture. We spend 2 hours with a client getting to know them gathering information and going back with a suitable recommendation that maybe involves a further
    hours work. We then go back advise to the clientbased on affordability , disclose commission or fee.Then the client asks” So what you are telling me if i went direct to the company i could get it at a lower cost” Moral here – At the first meeting state if i come back with a recommendation that meets your needs within your affordability and you do not take up the recommendation , then there will be an hours fee chargeable” Whats the problem!!

  4. This should not be allowed as it is “anti-competitive” and is generally only available to large sellers of protection policies and gives discounted brokers a huge advantage like those mentioned by others. Small players simply cannot compete.

    I remember raising this issue with Legal & General years ago but they would do nothing about it. I could discount all the commission for a fee but the premium I could get was higher than a broker who had “loaded premiums” and then discounted them all and also charged a fee. Because of the loaded premiums he could offer a lower premium and had an unfair advantage in my view.

    The FSA should stop this practice altogether but they won’t as the big players will argue they will lose substantial amounts of their business as it gives them an “advantage” and then everyone else may be able to compete with them.

    Smoke and mirrors really but unfair.

    Another failure by the FSA in my view but they know where their bread is buttered.

  5. Neil F Liversidge 25th February 2011 at 10:27 am

    Maybe we should all include a sentence in clinet communications along the lines of “The FSA charges me £X,0,000pa for the privilege of working and I earn £X0,000pa. To put that in context, the Chairman of the FSA (who I help to pay for) earns £X,00,000pa; the Chief Exec earns £X00,000pa etc.’

  6. The FSA claims it is not a price regulator, then allows companies like Independent to sell so cheaply they go bust. On the other hand small firms have to have what the FSA calls a viable business model.

    Then the FSA allows insurers to use IFA/Insurance Broker clients to subsidise larger distribution channels. Then it micro manages small businesses and abjectly fails to manage larger ones (or the banking crisis etc. wouldn’t have happened). After that it produces “statistics” which a 3rd form maths student could drive a coach and horses through to justify its actions.

    There is no level playing field and no effective regulation.

  7. Put simply, is it right that any adviser is able to negotiate a commission rate sufficient that the provider has to increase premiums for that advisers clients?

    A difficult question to answer because freedom of choice is good and it works both ways. However, if we as advisers are selling trust to our clients then we should never seek to gain at their disadvantage.

    Tied agents are different, they are not agents of the client.

    Insurers set out the premiums and commissions are negotitiable within certain parameters, based on quality, quantity, etc. As soon as we seek more and premiums rise we are in a very tricky position of having to justify commission.

    Maybe we should forget legal and regulatory requirements and simply look at the ethics involved.

  8. “Loaded” premiums may well mean the client pays a higher premium but the bigger issue for me is that strangely “loaded” premiums if sacrificed for a fee give the consumer an even cheaper premium than someone who sacrifices the same percentage of commission on a standard (not loaded) contract, giving the “loaded” premium seller a real advantage.

    They should be banned in my view.

  9. Problem, Micahel, is that we can all do this at present and it becomes a commercial decision.

    In some instances it makes sense. £500 p.m. premium translates into possibly £11,000 commission and there are many instances where you would arrange for a lower sum and a reduced premium. whether it is commercially expedient or ethics makes no difference.

    The issue I have concerns with is the firm or network that only agrees to deal with provider ‘X’ if they get 240% of LAUTRO rates, or whatever, and consequently consumer premiums are raised 10% or 20%.

    If that firm then reduces its commission and the premium falls back to the ‘normal rate’ then no harm has been done.

  10. Will this include Barclays AVIVA term insurance, which they seem to be flogging now with every loan.

    That shoudl make interesting reading!

    I’m told if an IFA gets a sniff of the policy you can save the clients loads on their monthly premiums!

  11. What worries me most is that this practice goes on and is to the detriment to the consumer. There is NO EVIDENCE whatsoever to how that one ditsributor is any better than another in looking ater clients. Lapse rates are sinilar, NTU rates are the same and cool offs are no different.

    This practice is designed to try and make a margin for the insurance co as well as inflate what goes to a network. How many netwoks would struggle even more without this?

    Why should a client pay 12% more for a product just becasure they went to an IFA who is a member of network A rather then Personal Touch as mentioned in an earlier comment?

  12. Guys,

    All protection with commission is “loaded”. The base price is the nil commission price, it is then loaded with a now arbitrary amount of commission based on an historic regulatory scale, LAUTRO in most cases. This just suits your argument.

    Some distributors go higher than LAUTRO and charge more, some go lower and charge less. There is no great morality in sticking to the standard rate.

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