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Switch way is the next churn?

McCarthy surprised many in the industry by seeming to morph into industry analyst Ned Cazalet while making a speech to pension industry leaders at Gleneagles. He called for urgent changes to the financial services distribution model, which he says is failing consumers, providers and advisers.

Referring specifically to churning, McCarthy said: “This merry-go-round as it has been so characterised, not only reduces, if not eliminates, the profitability of the business, it also proves a major obstacle to firms establishing long-term relationships with their customers. Questions also have to be asked as to how much of this recycled business is of negligible advantage to the customer.”

Speaking at a fringe event at the Labour conference in Manchester last week, Haddrill was asked by consumer watchdog Which? to respond to McCarthy’s stark view of the industry.

Haddrill accepted that some features of the market are not serving the market, the industry or the customer well but he took issue with what he saw as the FSA’s damning view on a practice which is positively embraced in other sectors.

He said: “It does seem to be the only market in the world where a degree of churn is not seen as a good thing. If you talk about telephone services or electricity services, you argue there should be competition that should lead to people switching from time to time. And that should happen in the financial services market just as much as in any other market so I reject what lies behind Callum McCarthy’s thesis.”

ABI spokesman Jon French says all that Haddrill meant to say was that some amount of switching between providers is a sign of a healthy and competitive market.

Axa head of pensions and savings policy Steve Folkard says: “The word churn has negative connotations but the view that a degree of switching is a good thing is borne out in every other marketplace.”

Standard Life chief executive Trevor Matthews says: “After A-Day, it makes a lot of sense for customers to review their contracts so switching meets many customers’ need. McCarthy is probably right that there is excessive churning based on IFAs switching customers to different products because of higher commission levels.”

Aifa director general Chris Cummings says: “I am deeply worried but I find myself in agreement with Haddrill. Rebroking can be a hugely positive thing. It is not surprising that contracts that were advised on a few years ago look second-rate now.”

But some might argue that Haddrill’s comments and specifically the comparison he draws between the financial services industry and phone services and electricity firms, suggests the ABI does not take churning sufficiently seriously.

Scottish Life head of communications Alasdair Buchanan refuses to speculate on any wider meaning underlying Haddrill’s comments but says any suggestion that the pension model is sustainable in its current form is unrealistic.

He says: “I agree with Haddrill that all switches are not bad. But I think that McCarthy was totally right to talk in the terms he did about the market. No one can say the pension market over the last five to10 years, with disastrous persistency rates and providers selling 10 notes for 5, is healthy. It is not sustainable.”

Buchanan also believes that Haddrill’s comparison between the financial services industry and more commoditised markets such as gas and electricity when talking about churning is invalid. He says: “Those industries do not have the same capital outlay at the outset as providers are paying advisers. I also doubt that their payments are capped at 1 per cent.”

Ned Cazalet is predictably more critical and reels out one of the key figures used in his Polly report – that 90 per cent of “new” business is recycled and the industry has spent 21bn over the last three years to acquire new business – almost 1,000 for every household in the UK.

He says: “If anyone is suggesting that the current system is working then I am a one-legged ballroom dancing Dutchman called Gladys.

“If the ABI does not see the extent of the problem, then I think it is at odds with many of its members.”

The ABI says it is not underestimating the problem of churning in the industry.

Some product providers, strictly off the record, have criticised McCarthy’s attack as being far wide of the mark while others have expressed their support for the comments and backed calls for radical change.

It is clear that there is division in the industry but perhaps this will only come to a head if the FSA does decide to back up its tough talk with action.

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