View more on these topics

Payback for renewals?

With the remuneration profile of the financial services industry moving away from up-front indemnity to longer-term payments of renewal commission, it is wise to look at the basis of the new payment stream.

Already, we have seen that life office and unit trust managers do not apply the payment of renewal commission uniformly. Some will transfer the contract renewal to a new adviser and some will lock the commission in until the original broker cedes the agency.

It is all very unfriendly to the client who has, after all, agreed to the payment of renewal commission in return for ongoing service.

The irony of the spat that has been seen over recent times on rebates of commission to clients by discount brokers is that it fundamentally forgets the client.

The contractual basis of renewal

The contract between the provider and the client allows for payments to be made between the client and the adviser. The client enters into the contract after having the basis of remuneration to the provider and the adviser disclosed in the key features and illustration.

The client and the provider are key in this relationship. The adviser at this point has no contractual role as the payment of commission is an element agreed between client and provider.

Moreover, the adviser&#39s contract with the client is based upon remuneration on an agreed basis, usually from product commission.

Protected renewal

The provision of renewal to a broker who no longer advises on an investment seems illogical in the extreme. The fact that the client can authorise a trans- fer of servicing rights to a new adviser logically means that with it comes both the benefits and burdens of the contract. One of the benefits of the contract is the payment of renewal commission to the current adviser.

What is highly unfair is the fact that clients are not aware that they are being asked to agree to pay the original broker renewal commission even if they are not advising any further.

Legal issues surrounding protected renewal

Standing back for one moment, those providers which allow this practice are seemingly forgetting who owns the investment contract in the first place.

A contract between a client and a provider merely lays down the delegation of the investment management and charging structure on a product to the provider. What it does not do is give the product provider the ability to make decisions as to who and who is not to be remunerated for ongoing advice.

First, the locking in of commission equals paying for a service but not getting any. Second, a client has the ability to challenge any contract term locking in renewals to the original broker on the basis that it offends the Unfair Contract Terms Act 1977.

Legal challenge

Although commercially locking in renewal commission has an advantage, it seriously hampers client choice.

I would suspect that a provider or original broker arguing that they are entitled to the lock-in without showing evidence that they made it clear to a client would fall on stony ground.

I have not seen a challenge to protected renewal on the basis I have set out but would expect one to be successful on the basis that judges are not in the business of sanctioning the use of client money without clients having some say and control in the manner it is used.

I doubt that reason-why letters are filled with paragraphs which spell out in no uncertain terms that by choosing XYZ provider you pay part of your ongoing cost to someone who may never work for you again. Any renewal-protected product borne of a reason-why letter without this explanation is vulnerable to challenge.

Conclusion

The new regulatory regime is about consumer choice and flexibility.

Protected renewals do not sit square in a consumer-friendly world. One angry client and that in my mind will be the end of them.

Recommended

Britannic stakeholder take-up on course

Britannic Assurance claims it has already enrolled 2,800 businesses to its stakeholder pension. Britannic is offering staff free accidental death benefit up to the value of £10,000 from the date of enrolment up to October 2001. Britannic has specifically targeted companies employing between five and 150 employees. its head of stakeholder John Wilkinson says: “We […]

Staffordshire Building Society – 2 Year Stepped Discount 1 Per Cent Cashback

Thursday, 15th March 2001.Type: Discounted rate cashback mortgage.Discounted term: Two years.Discount: Three per cent in first year, two per cent in second year.Payable rate: 6.8 per cent.Minimum loan: £1,000. Remortgages for capital raising £25,001.Maximum loan: Up to 90 per cent of valuation subject to a maximum of £500,000.Income multiples: 2.5 times joint income.Arrangement fee: £125.Redemption […]

IFA guide aims to boost consumer confidence

IFA Momentum Financial Services is publishing a Guide to Savings and Investments which it hopes will lead to increased consumer confidence when choosing financial products. Momentum says it has produced 100,000 copies of the glossy A5 guide in response to increasingly sophisticated consumers demanding more appropriate information on their investment options. The 12-page guide focuses […]

GE Life links to EuroStoxx

GE Life has introduced a fourth version of its high income and growth plan that is also available as an individual savings account and for personal equity plan transfers.This offshore investment is linked to the EuroStoxx 50 index and offers annual income at 10.25 per cent over three years or a monthly option at 0.78 […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com