Survival will require a hard-headed acceptance of the world as it is rather than wishing for the world of polarisation that is shortly to be swept away by a new tidal wave of legislation.
The concept of polarisation came about as a result of the new system of regulation introduced by the original Financial Services Bill in the late 1980s. It meant that companies and the people employed by them to sell and advise on insurance and investment products had to represent either one company or give what was then described as “best advice”. This meant they had to offer insurance and investment products of several different companies and select the best one to suit a client's particular circumstances.
The situation which preceded this allowed for multi-tying which meant you could represent the products of more than one company but with no requirement to give best advice. This led to a situation where products which paid the highest commission were sometimes recommended rather than those which were right for the client.
Polarisation was introduced by the Government through its regulators in response to the many misselling scandals of the past and because it was seen as a way to rationalise the industry down to a more manageable number of product providers and marketing channels.
Under the guise of consumer protection, some of the bigger vested interests within the life insurance and pension industry, including several of the high-street clearing banks, shaped the present polarised environment into the form that it has assumed today.
The associated costs of regulation have fallen most heavily on the smaller providers and the bottom end of the independent financial adviser sector – although, ultimately, the consumer pays.
It is interesting to note that hardly any other countries in the world outside of the UK have ever had a legally imposed environment for life, pension and investment business. However, until recently, we were told that such an environment was an essential precursor to consumer choice, consumer protection and access to independent financial advice.
The regulatory framework in the UK is now being steadily changed as part of the move towards one-stop shopping – a concept which is not yet fully embraced by the UK public or even in the US where the idea was conceived over 25 years ago.
Suddenly, we are being told the opposite as part of a politicised debate in which the Government has a vested interest. Essentially, the Government wants the public to save more money for its own retirement provision. The number of working taxpayers is and will be too small to handle the burden in the years ahead. Since it has insufficient headroom to raise taxes directly, it needs to make the process of selling savings much more efficient.
It aims to do this by:
Replicating what has already become commonplace in the US for soph-isticated high-income consumers by commoditising life, pensions and savings products so they can be bought anywhere without the need for complicated advice.
Reducing buyer confusion by editing and simplifying choice.
Further reducing the number of product providers by creating conditions which will further accelerate the natural process of Darwinian selection that exists in our capitalist society.
What will all this mean for building societies who want to stay mutual and for insurers and product providers and IFAs who want to operate as they have done in the past?
There are perhaps eight main points for those organisations to consider.
It will involve a step-change to a new best-in-breed world in which technology value management and streamlined processes are used to reduce operating costs and improve cus- tomer service. Along with this outsourcing and co-sourcing of certain functions may, in selected cases, form part of the solution as well.
It will involve morphing and differentiation and much cleverer use of technology to deliver products to the customers of the future rather than those of today.
As the public become more informed consumers of financial services and commoditised insurance products, the product offerings and business models of the insurance providers will have to change. This will lead to a need for the building society and IFA sectors to change their business models and the nature of their offerings to match the new circumstances.
One of the key drivers of these changes will, for the foreseeable future, be the internet and, more immediately, call-centre technologies.
It will mean a need for greater speed and efficiency, probably to American levels, and the borrowing of methodologies that have become common-place in leading global financial institutions such as Aon, New York Life, Allianz, ING, Skandia, Zurich, Aegon and Axa.
Examples of these include the use of state of the art web-enabled call centres using intelligent routing coupled with outsourcing of selected administrative functions with the underwriting of policies taking place in other countries with documents upstreamed and downstreamed via satellite link as required.
It will require an understanding of the proposed legislation and the best means to profit from it by embracing changes which facilitate new ways of managing relationships with product providers and potential suppliers.
The legislation will almost certainly create winners and losers. For big building societies and big brokers, it will be easy to get “permission” to become multi-tied.
Conversely, smaller regional societies and smaller brokers may well have difficulty in persuading their current primary insurance provider to grant this permission because the smaller volumes of business they transact will render their negotiating position relatively weak.
As product pricing becomes more available and transparent and consumers of financial services become less loyal to particular brands and companies, the role of appropriate technology as a means to retain customers becomes paramount.
Possible ways around this problem might include creating new business entities either on the internet or at a different geographical location which would then be free to form new relationships with different insurers.
Understanding the ramifications of this legislation in each specific case will be as essential to creating the right solution as will correctly evaluating and selecting the right mix of insurers and products.
From this point, a workable strategy can be formulated and the concept of the new world environment mapped out in detail together with the route to get there.
By doing this, in conjunction with knowledgeable strategic partners, the organisations affected by these chan-ges can move forward in confidence and serve their customers in pragmatic and profitable ways which fully satisfy the needs of all the parties involved.
It is interesting to note that hardly any other countries in the world outside of the UK have ever had a legally imposed environment for life, pension and investment business