Life companies will face a battle to find the staff resources needed to cope with the ban on legacy commission on top of their work for other initiatives such as Solvency II, says consultant Ned Cazalet.
The FSA published its consultation on the treatment of legacy assets last week. It confirmed that trail commission for ongoing advice will continue but legacy commission paid on changes to existing products after December 31, 2012 will be banned. The regulator wrote to trade bodies in March, clarifying that legacy commission would be banned. Until then, life offices had been under the impression they would only have to change their systems to cope with new business after the RDR.
Currently, providers’ systems automatically generate commission on top-ups to existing investments. To comply with the legacy ban, providers will have to amend their systems so that they do not generate commission or decide not to accept top-ups altogether. Alternatively, as the ban only applies to advised sales, providers could choose to accept top-ups on a non-advised basis.
Cazalet Consulting founder Cazalet says: “We are anticipating that this issue of legacy commission is going to be a major pain in the rear for providers. The financial pain on its own is not necessarily so much of a problem but it is also a resource pain. Bear in mind that looming on the horizon we have all the issues on Solvency II. We are hearing from providers that this will put a huge strain on resources.”
Cazalet says the work involved goes beyond systems changes and will include product redesign of pensions and bonds as well as new marketing material to communicate the changes to the public and advisers. He says: “The industry is going to have to go through existing business products and change the vast majority of them all at the same time and all for the same deadline. On top of this, there is the huge issue of Solvency II. Without Solvency II, this would be a major challenge, with Solvency II, it will be a real stress.”
Solvency II is not the only issue insurers have to contend with. The European Court of Justice’s ruling that insurers cannot price products based on gender, the onset of auto-enrolment and the growth of the platform market all present big challenges and all have to be tackled over the coming year.
Cazalet says: “We are hearing from some providers that they are maxed out in terms of internal capacity as it is. 2012 is going to be a year of sleepless nights.”
Aviva director of distribution development Dean Lamble says: “We were lobbying with the industry for a year’s delay to the ban. It looks from the paper as if the FSA still plans to push ahead with December 31, 2012 and we are not happy about that.
“There are a massive amount of system changes that providers need to make and that takes time. With the changes we are pushing through under the RDR and Solvency II, the industry felt we needed at least five to six quarters of notice to be able to get our systems up to speed, so we are still pushing back saying it should be delayed by a year.”
Aviva estimates its current RDR spend will increase by 25 per cent if it amends its systems across all legacy products.
The Lang Cat principal Mark Polson says the difficulty is that old systems were never built to be flexible and points out the cost of changing existing systems is often higher than building a system from scratch.
He believes the legacy ban could have a far-reaching effect beyond relatively short-term system changes. Polson says: “A lot of the value of insurers is locked up inside the back book. The new business contribution of the business they sell now is not that high. The older stuff, which may have had higher charges or more restrictive options, throws off more profit. If that business gets up and wanders off, we are talking about implications on share price, commerciality and viability of providers.
“It is not all going to happen overnight but over three to five years, this paper could have some deeply profound impacts on the industry.”
Zurich UK Life principal of government and industry affairs Matthew Connell says: “There are different ways of complying with the legacy ban. The most expensive one would be to change all existing products and make them compliant with adviser-charging.
“This would probably cost the industry hundreds of millions of pounds and the costs would just be prohibitive. It might be we close products to new top-ups because the other way of complying might be so much more expensive.”
Connell believes the industry is likely to take the “more pragmatic” route of choosing which products it will adapt to accept new top-ups, particularly as there is a small window to make system changes before the RDR deadline.
But he says there will be further cost implications for products that are closed to top-ups, such as communicating to customers about why they can no longer increase their existing investments.
Connell adds: “The other costs you have got to bear in mind arise if you are going to close products to top-ups. What are the things you have to do to make sure customers are not unhappy about it? There might be costs in there that do not necessarily have anything to do with improving systems on new products.”