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On the trail of the closed companies

It has become fashionable to attack the payment of ren ewal commission to advisers. Not only have att acks been made in the consumer press of late but a recent art icle in Money Marketing by Lorna Bourke also savaged the payment of renewals.

Does this argument have any credence? Consider rec ent events at Equitable Life.

The company marketed its pension plans and other financial products on the back of massive advertising in the quality press. It ran an expensive TV campaign suggesting the high costs of pen sion policy charges (by other providers, of course) were the major talking point of the chattering classes at their dinner parties. It also had the most highly paid salesforce in the life insurance industry.

Well, we all know where blind faith in that dubious message has got Equitable policyholders.

The naive bel ief that payment of anyone by results (commission) was somehow demeaning (to the purchaser of the service) and an inferior way of remunera ting salespeople compared with high salaries, bonuses and expensive advertising now has a hollow ring.

Less than a year ago, we saw an equal size company closed to new business by its parent, when Lloyds Bank closed its loss-making subsidiary Abbey Life. Two huge direct-sales companies have walked away from their consumers. Numerous other companies have gone the same way.

There is a common thread in all the cases. Customers have been left without any assistance or advice on their policies. In the above two cases, clients have been told to seek the advice of an independent financial adviser.

These are the very same (commission-remunerated) adv isers who are under most threat from the Treasury&#39s proposed agenda for depol arisation.

They are also the very people who were vili fied by Equitable Life for seeking payment for their work by commission.

Now, it is IFAs who will have to pick up the pieces from these two high-profile disaster stories – along with numerous other small ones, such as Century Life, General Portfolio and Premium Life plus many other companies in the “vulture fund” of Windsor Life.

Look at the real problem. Who pays for continuing to service the policies sold by the salespeople of Equitable, Abbey Life et al?

Are IFAs to carry out the work out the goodness for their hearts or are they justified, even forced, to charge a commercial rate for the job?

Now, if these unfortunate policyholders had instead been advised by an IFA and bought, for example, a Stan dard Life or Scottish Wid-ows (now owned by Lloyds Bank) policy, there would be no problem.

As part of the commission package, agreed at the outset, IFAs receive a small servicing commission for providing continuing adv ice over the policy.

How very sensible, especially as the servicing commission can always be transferred to another IFA who may take over the client at a later date.

It ensures the availability of service and advice throughout the life of the policy. I suppose it is hard to imagine a more sensible system.

Now the crunch – Abbey Life owned by Lloyds TSB, will not pay any servicing commission to an IFA for doing its work for them, looking after the clients they deserted. Could this be construed as a breach of contract?

If a legal view was sought and it was established that,when the advice was given which led to the contract, ongoing advice to the end of the contract was to be available and, in particular, any trail commission was being charged for ongoing service, then lack of service would be a breach of contract. This would be compounded by the penalties for transfer of funds or early suspension of premiums.

It is not beyond the realms of possibility that companies could be forced to offer advice to clients in closed funds. This would involve fully authorised and regulated advi sers.

Alternatively, the client could have the right to claim from the comp any for the cost of the advice from an IFA.

An alternative could be that any trail commission should be provided as enhan ced allocation as a price of non-availability of advice and penalties for being locked into the contract. If the legal system took such a view, there could be some very interesting repercussions all round.

Within our practice, we have negotiated reductions in penalties for early suspension of premiums with one com pany now closed to new business.

When the policy was originally sold, if it was implied that a continued service would be provided to the policyholder, that service would include a menu of the following.

In most cases, the client is still under an obligation to pay continued premiums on pain of suffering massive penalties. Equitable Life, to its credit, did not include such penalties although Abbey Life did not.

While considering the subject of companies closed to new business, it would be very interesting to know the persis tency record of their policies. Can the FSA assist over this statistic?

I find it unfortunate that there should be so much uninformed criticism of renewal commission. Surely the problem is that the initial commission was far too high and the servicing was too low. The new stakeholder regime will cut pension commission to between a third and a quarter of pre-stakeholder on initial and renewal commission.

I believe that companies closed to new business which demand continued funding of policies while applying massive penalties and provide no service are in breach of faith and maybe even in breach of contract.

If a company closes to new business, then it needs to be taken over by another company to provide service.

What a pity that Lloyds TSB did not incorporate Abbey Life, Target Life and Hill Samuel into Scottish Widows which it bought at considerable cost. If it had done so, it would have done right by all those unfortunate policyholders who have been victims of commercial decisions taken purely to benefit the bank&#39s shareholders.

It seems to me remarkable that the proposed new depolarisation regime is likely to be designed primarily to assist the banks. So much for Gov ernment concern about consumer interest.

While the major concern may be directed towards pensions, the necessity of ongoing advice is no less signif icant where unit-linked life insurance or whole-of-life con tracts have been sold. End owment policies will also have to receive advice, especially in view of the new two-year procedure. How can it be provided in such cases?

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Case study: administration — managing group life schemes

Our client leads the global market in high-tech electronics manufacturing and digital media. The trustees of the company’s final salary pension scheme insure death-in-service lump sum and dependants’ pension death benefits for active employees, as well as dependants’ pension benefits for deferred members (those who have left service).

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