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Tech revolution

In a financial services world where it seems products, systems, services and even companies change weekly, there is one market where, in the broker&#39s mind, change must seem a long time coming.

Over the past 10 years, the traded endowment policy market has grown dramatically from just a few policies in 1989 to a market worth around £500m last year.

Despite this rapid growth, the way IFAs access this market has remained untouched by technology – until now.

This is despite the fact that, to satisfy IFAs&#39 compliance requirements, they need to be able to demonstrate they have got the best price for a policy.

With every newspaper thinking that the words “endowment” and “scandal” are entwined, the compliance issues surrounding the disposal of policies are as rel-evant as ever.

Unless a client was planning to dispose of a policy anyway, there is probably no good reason to surrender or sell a policy just because they have had a projection statement from their life office.

If there is a projected shortfall and IFAs believe the figures are realistic, then they may choose to fund the shortfall by other means rather than putting more money into the existing policy. It is unlikely, though, that disposing of the policy itself would represent best advice.

But there are good reasons why clients need to dispose of policies. Research by Free shows the biggest single reason is still divorce and the restructuring of mortgages that inevitably follows. The surrender figures are staggering.

Our actuaries estimate that last year, in addition to the £500m of policies sold, a further £1bn of policies that could have been sold were surrendered to the life office.

For IFAs, the PIA rules are crystal clear. I quote from note F7 of appendix F6 of the adopted Fimbra rules in the PIA rulebook: “When a member is asked to arrange surrender of a with-profits endowment policy, it should advise the client, where appropriate, that it may be possible to obtain a higher cash value through the secondhand policy market.”

There is no specific rule covering how many offers an IFA must obtain for a client. However, by looking at how other products are treated, together with comments made by the PIA during periodic inspection visits with market-makers and, of course, common sense, it is clear that at least three market- makers should be asked to make offers on a policy.

Finding the best price for an endowment policy is akin to the annuity market. No one company will offer the best rates across all different terms at any one time. Market-makers have different buying requirements depending on level of investment demand.

IFAs need to pay careful attention to the regulatory status of the market-maker. Those market-makers directly regulated by the PIA are, of course, governed by the PIA rules and subject to periodic inspection visits. They have to meet stringent solvency requirements and are covered by high levels of professional indemnity insurance.

It may surprise IFAs but unregulated companies can operate in an arena where IFAs should be able to feel they have an element of protection.

The sting in the tail is that unregulated companies can operate by using “cuckoo” compliance. In other words, they rely on brokers&#39 compliance umbrella.

This means that IFAs are responsible for everything they say and do during the entire selling process.

With the compliance requirements clear, the IFA is faced with a messy process to obtain the best price for policies. A fax to, typically, eight market-makers will generate eight different responses presented in eight different ways, with eight different terms and conditions and perhaps arriving over eight different days.

Until the launch of earlier this year, the only alternative to this labyrinthine process was to use one of the conventional trawlers. While they would be able to find a range of prices, this service comes at a cost – a big proportion of IFAs&#39 commission.

We have seen examples where the commission taken by the trawler is obscene. These enhanced rates are taken from the offer to the client and have a significant impact on the amount the client receives.

The process is still a manual one and by using a conventional trawler you will more than likely get prices from the unregulated market-makers with all the dangers that they present.

By using a service such as, the submission of policy details and the collation of bids is done electronically. Details will be sent to nine regulated market-makers and, as the service is funded by the market-makers, the cost to the IFA and their client is free. A league table of offers is produced to demonstrate brokers have searched the market.


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