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On the level

Recent comments suggest that some people think commission is not a real issue. However, what of the companies which, as deliberate strategy, set out to build market share through raising commission levels, provoking a round of me-too actions by their competitors.

What of the view, expressed to me by one provider a few years ago, that commission is the “magic spark” that motivates salesmen to employ tactics (usually fear) to ensure the public make proper provision for themselves and their families.

Those with long memories will know that commission has been a public issue for many years. I researched the DTI archives back in the 1980s and found that the problems were evident back in the 1940s when long-term insurance was making a comeback after being in suspension during the war years (too many death claims).

The pre-ABI trade body for life offices (LOA) tried to bring order to this unseemly scramble to achieve a bigger market share by introducing an industry code setting out the way commission should be paid and the maximum amounts.

Unfortunately, they could never quite get all the life offices to stick with it, so they gave up in the early 1980s. There followed a lobby by the bigger companies to make the commission agreement statutory, which succeeded through the new regulator Lautro until the European Commission ruled the agreement anti-competitive.

Since disclosure, successive regulators have struggled, through disclosure, to engage the public with levels of commission and get them to “shop around”.

The latest version of this is the menu. Advisers have naturally resisted these moves but the disclosures appear to have had no effect worth speaking of (a lesson, perhaps, for our general insurance colleagues, who are currently going through the same process).

But the central issue remains the use of commission as an incentivisation mechanism and the loss of a slice of consumer assets to fund it.

As we said to the ABI last year, it is long overdue that the policy toward commission be looked at to try to square our practices with fair treatment of customers.

One approach, which has the merit of being fully transparent, would entail the adviser telling the customer how much a particular advisory or arranging service would cost (that is, ‘I will do this for you and this is what you will need to pay me’), and then discussing the alternatives of paying a direct fee or costing it into the product.

Of course, providers would need to quote rates net of commission, a big change in procedure but at least the customer would know more clearly the price of the service and product they were buying.

I suggest that the FSA might like to look at this approach as part of its review of retail distribution. What is certain is that the issue of remuneration must be central to any study of the future of the personal financial advice market.

John Ellis is CII group public affairs director


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