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Paying for protection

Nicola York examines why IFAs beliefe a ban on up-front commision for protection advice could kill off the market.

Lifesearch head of protection strategy Kevin Carr says consumers will not pay fees for advice on protection products as they do not see the value in it.

Carr says protection IFAs should not be lumped in with pension and investment IFAs in the commission versus fees debate.

He believes there is no detriment to people buying commission-based protection products because there is no fund element for the commission to eat into.

Scottish Widows head of protection research Nick Kirwan says consumers would far rather pay for advice by spreading the cost over the term of the policy as part of their premium. He says this is more tax-efficient as it avoids the VAT payable on a fee.

Kirwan says: “Initial commission on protection policies has an important element of consumer protection that people often miss. As commission paid up front to the seller is clawed back if the customer stops paying the premiums in the early years, the seller has an important financial interest in ensuring that the customer is completely satisfied.

“On the other hand, once a consumer has paid an up-front fee, if he or she is not satisfied with the advice and/or the policy, it may not be easy to get the fee back.”

First-time buyers are another consideration in the overall fees versus commission debate. Kirwan says if the industry moved to fees route, a lot of borrowers would have to add the fee to their mortgage.

Direct Life & Pensions sales and marketing director Richard Verdin fears that these arguments are unlikely to be effective, as they are the same as those presented during the development of stakeholder pensions which were ignored then.

Verdin says: “They were simply thought to be the rather obvious statements of a group full of self-interest. For the distributors to win this particular argument, it cannot be one peppered with emotional or self-interest statements.”

He believes the FSA accepts the transparent effect of commission on the pricing of insurance premiums and this is why it did not include commission disclosure as part of the Icob regime.

He says: “Insurance commission is a transparent building block of the price paid by the customer. Higher commission equals higher premiums and lower commission equals lower premiums.

“Commission is not the most significant of the price building blocks either, otherwise, independent distributor premiums would not be consistently lower than the non-commission-paying direct sellers, bancassurers and tied agents, yet they are.”

Highclere Financial Services partner Alan Lakey says fee-based advice, whether for investments, pensions or protection, is largely the preserve of the wealthy.

He says: “It is clear that, faced with a fee, the typical client will decide that an internet shopping expedition or a visit to the Woolwich has greater appeal.”

Consumers are happy when they are told that the cost of advice is included within the cost of the product, according to Lakey, who says they do not express concern that they are being overcharged.

He believes the debate has been fuelled by interested parties, including the FSA, Which?, the Financial Ombudsman Service and what he terms “the bucket-shop merchants”.

Lakey says: “The FSA has no business intruding on adviser/client and adviser/ product provider relationships. The FOS should remove itself from the discussion arena as such matters are clearly outside its remit.

“The bucket-shop merchants who know the cost of everything and the value of nothing and feed off the responses they get from mailshots and enticing web pages are also fuelling the debate.”

But Lakey disagrees with Carr that protection and pension and investment commission are separate issues. He warns that removing commission from any product will result in a massive fall in consumer purchases and cites stakeholder as an example.

CBK principal Peter Chadborn says some parallels can be drawn between commission on investments and protection but the fundamental difference is that consumers will not pay fees for protection advice. He believes it is essential that commission remains for protection products.

But Chadborn does have issues with the way that commission is structured. He says: “In many protection cases, the consumer does not know the cost that they are incurring for the advice they are receiving as commission does not have to be displayed in all cases. This is potentially not in keeping with treating customers fairly.

“Furthermore, full indemnity commission only for protection advice means that, for cases of a certain size, the commission received is not consummate with the actual cost of the advice.

“This issue has been addressed in the wealth management world by having commission options that can be tailored to the real cost of the advice and level of ongoing service that the client requires.”

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