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Solving the loaded question

The issue of premium loading has flared up this summer and is dividing the industry. Current commission rates on protection are quite adequate. I have no problem negotiating on the basis of volume business, which I am sure lots of big networks do on a regular basis, but what I object to is when this is extended to asking for so much money that the only recourse left to the company is to increase premiums to clients. I cannot see any justification for that.

We have spent the last year or 18 months saying that protection should not be under the RDR and this tells the FSA that it should.

When you are reviewing a company for a client, you need to be objective when choosing a company and price is quite low down on the list.

Where is an argument that premium loading can pay for a better service but I do not agree with that in general.

There are a few instances where that might be the case. Let’s say an adviser in an area of low property values and low average salaries compared with London is selling mainly lowvalue policies. These firms have the same office and regulatory costs as I have but will be getting lower levels of commission.

But I still think it is wrong to have differential pricing. I do not mind differential commission, that is a fact of life, we will never get away from that.

But differential pricing is wrong. I know there is an argument that this goes on with investments but that is different. Investments are nebulous.

But when it comes to protection, the price is the price. When a company works out its price, it has said this is the true cost of the plan, this is adver-tising, this the cost of comm-ission, this is our profit margin and this is the premium and none of those are open to any significant change, except for the premium.

There are people who will say we have a £2.4trn protection gap, we need to sell more and if it gets people buying it, then it is a good thing.

I can understand that argument but if we get back to treating customers fairly, this means not taking advantage of them by giving them to a company which is going to charge them more. If you have a business model where you are their IFA and are in law the agent of the client and are doing the best for them, then I don’t think the argument for loading premiums works.

About 18 months ago, we were picked up by the FSA for claiming that protection cannot be missold. But this is sending out the message that the FSA was right, that it can happen. We do not need commission removed as a result of people being greedy.

Alan Lakey is partner at Highclere Financial Services


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. I am disappointed that Alan has not had any comments in support of his stance.

    Are we advisers only making comments when we can moan and say how badly we are being treated??

    I will be very worried if the premium loading takes place. These networks in questions can decide to encourage their advisers to charge the client up front a fee for the service as most advisers do for mortgages. This would at least be transparent, but going down the road of hiding the increase in higher premium payment may put the whole protection industry in disrepute.

  2. If market forces are not to be allowed to prevail – allowing advisers to sell whatever they can get way with – then perhaps a better alternative would be to remove protection from the private domain ?

    If free markets allow nasty things like differential pricing then perhaps a commission and fee free Nationalized Group Protection scheme, funded through the NI system would be better ?

    No need to worry about greedy advisers, no need for advisers at all

  3. This issue has been bubbling along for a few weeks now – it’s great to see Alan ensuring that it does not get buried in the myriad of others issues floating around the market.

    There appears to be enough of a concern for the Regulator to take the opportunity to investigate this further – do we really want that?

  4. As is the case with mortgages the manufacturers have always been able to decide what they charge and how much they pay their introducers for protection (insurance), take the multi ties of Barclays or the ‘exclusive’ deals with the likes of Tesco or Santander, (non advised and hefty commission).

    The FSA has failed to tell me why the RDR doesn’t cover insurance or mortgages, it can’t tell me why there is this discrimination by advice channel.

    I used to think I was confused, now I’m not so sure.

    Anyway, the RDR plays right into the hands of those firms which are large enough to influence the providers while the FSA said it wanted to remove provider influence!!

    Can anyone see some balance? I can’t.

  5. I think this article assumes that all the public have or want access to an IFA. Are we really deluded enough to think the vast majority of people will pay for any kind of advice including protection? The most likely outcome is people will just toddle on down to their bank and end up with their over priced protection.
    How far do we go with this arguement? How about ‘dual pricing’ on mortgages? Lets ban that. Oh and tescos sells digestives cheaper than my corner store shall we leglistate for that too?!!!

  6. Paul, I understand you views but at the end of the day, the customer is being charged more for his protection cover just to line the pockets of the network. The Providers have to participate in the process to gain approval on protection panels. I suspect that not all the additional commission is being passed to the intermediary. Surely this cannot be right? Does it not also demonstrate that some distributor models are built on sand?

  7. @John. The problem with bringing the concept of free markets in here is that free markets can be abused leaving the unknowledgeable, irrational and/or desperate in vulnerable positions.

    Clients are often in one of those three positions – they’ve came to an adviser for a reason haven’t they?

    Some form of regulation is necessary in free markets to prevent abuse of the vulnerable. The question with regulation is always where to draw the line because you can’t protect all the people, all the time, but still allow free markets to perform their socially useful function.

    I agree with the side of the line Alan thinks this issue falls.

  8. An interesting point, but it raises further questions. How on earth anyone at anytime could have thought that protection should be excluded from the RDR really defeats me. Indeed Alan shoots himself in the foot with his latest article “The Reality of Bias”

    Knowing Alan I cannot fathom why he appears to take an obstinately misleading and inaccurate view. The public does not have to pay a fee. All you need to do is to explain to the client that the charge may be taken from the product. In this case the very result of which he complains in this piece will be the result – a higher premium – but then no one works for nothing. But at least we start with a ‘clean’ product. This of course is where the FSA trusts to market forces and expects the life offices to play the game and not pump up their margins – fat chance! So it seems fairly inevitable that premiums will rise for UK life contracts. What of contracts passported in? Will these firms (if they are in the game) still pay commission? If the rules are set will the Regulator permit UK authorised intermediaries to take this commission? Has the Regulator missed a whole swathe of unintended consequences?

    Going back to the ‘Bias’ piece. I too think the FSA have been cack handed, but not in the way Alan thinks. They just have not explained the rationale well. Without evidence to the contrary it is very hard to escape the conclusion that those railing against commission would rather not have to enter a conversation where they tell the client up front and unequivocally how much the advice will cost them. For too long many protection advisers have been living off ridiculously high commissions. Disclosure (if made at all) often appears on page 36 in tiny print. How does one justify the differentials in commission between (say) level term or level term with CI? The extra amount of work involved is disproportionate to the commission paid. (And by that I mean too much). How do you prove that there is no bias between not only WHAT is being advised (draw up the hearse and let them smell the flowers) and which company is selected – as the disparity between one providers commission rates and another’s can be substantial.

    So in conclusion I can only tell Alan – come off it mate – your record has worn out on the commission song. As far as life offices are concerned I guess we are all whistling in the wind – they have always tended towards mendacity if they can get away with it.

  9. You’re off-tack here, Harry.

    This article relates to artifically increasing premiums purely to meet the demands of those mdistributors who require higher commission rates.

  10. Why is the IFA commission/price blend the “right” one and all other blends are unacceptable?

    We all pay more for things everyday that can be bought cheaper elsewhere and we do because of perceived extra value – whether that’s through service, convenience or brand.

    The key is transparent disclosure.

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