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Radical departure

It is probably fair to say I have not been the Association of British Insurers’ biggest fan over the years. In my view, and that of almost all journalists I have spoken to, the insurers’ trade body is one of the most defensive and outdated organisations in this industry.

Its refusal to accept that members did anything wrong in respect of widespread pension and endowment misselling and offer some sort of apology to customers, along with its invisibility over inappropriate sales of inadequate and expensive payment protection insurance, are symbols of the ABI’s approach.

What always staggered me was the fact that even when the ABI claimed to be listening to consumers and their representatives, it was doing no such thing.

I recall attending one of its all-day conferences a few years back when almost nothing that various critics had to say appeared to pierce the sponge-like complacency of its senior executives.

A few of us left Gresham Street at the end of that day and repaired to a nearby pub to compare notes. The overwhelming impression was all our comments had somehow been uttered in a soundproof box.

All that said, the ABI’s response to the FSA’s retail distribution review proposing so-called factory gate pricing is genuinely innovative and offers the potential to radically alter the shape of the industry to the benefit of consumers and IFAs who are strong enough to take on the challenge.

Factory gate pricing – or customer-agreed remuneration for intermediary services as the ABI prefers to call it – involves a system whereby consumers agree with their advisers the price they will pay for advice. This can be a standard charge or one negotiated between the consumer and adviser, depending on the business model adopted by the intermediary. Under this model, the client understands clearly what services will be provided.

The clear implication of this system is that the product itself comes with few or any charges beyond those the provider levies to pay its development, marketing and administration costs (and make a profit).

The IFA firm decides what additional fees it needs to levy for it to provide a given level of service to the client.

Important, factory gate pricing applies to initial charges as well as trail commission. If no genuine advice or servicing of the client takes place, whether by agreement or by default, the adviser receives little or no payment for their work.

All charges have to be agreed with the client based on a clearly defined contract which lays out exactly what services will be provided.

From the perspective of many IFAs, such a model has potentially grave implications. For a long time, a substantial nucleus of advisers have taken for granted the fact that, even if they do very little in terms of meeting clients’ ongoing needs, they will be paid by providers.

This, as several comments in Money Marketing have made clear in recent weeks, has been a critically important cushion for IFAs, sustaining them at a time when sales have been weak.

Moreover, rather than entering into a serious discussion of precisely what they will do for their clients, it has been much easier for advisers to portray the payments they receive from providers as a sort of going rate over which they have little effective control. The client is lulled into feeling that there is little point in seeking out better alternatives, certainly in terms of cost, as the same charges apply everywhere.

Factory gate pricing alters that dynamic. It forces advisers to explain and justify – and also to up their game if they want to compete seriously with their peers in terms of quality of service to clients.

There is one serious and another less serious objection to this model. The first is that factory gate pricing could put advisers at a pricing disadvantage as distributors when compared with other advice channels such as tied and direct sales.

The reality is that if genuinely independent advice and top quality service is the key differentiator between IFAs and other salespeople, the argument becomes one of what value to put on that advice. That ought to be what IFAs want, surely.

The second objection comes from those IFAs who argue that their clients are happy with the service they receive, otherwise they would not remain in that relationship with their advisers.

I do not think that argument holds water. The advice market is currently inelastic, largely because consumers have little or no idea what to expect or ask for in terms of their relationship with an IFA. Making price a much clearer determinant will help in that process.

Of course, a consequence of factory gate pricing is that many IFAs who have grown fat on the backs of their clients will no longer be able to sustain their businesses going forward. Others, however, will thrive on the challenge.

That such a radical set of ideas could have come from the ABI is intriguing.

Nic Cicutti is editor of moneysupermarket.com. He can be contacted at nic.cicutti@moneysupermarket.com.

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