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Teps to rise in the fall

In September, an FSA rule change takes effect which will require life companies to inform clients who are considering surrendering their policy of the alternatives to surrender.

This step is the result of investigations begun by the PIA and picked up by the FSA earlier this year when it issued Consul-tation Paper 106. This looked at the issue of telling endowment policyholders of their options, together with similar issues surrounding the open market option on pension annuities.

This rule change is going to have a huge impact on the traded endowment market and all those who deal with endowments.

Most IFAs are familiar with the Tep market and have been advising clients on the alternatives to surrender for many years. Until now, life companies have not shared this responsibility.

The main reason for this is historical. When IFAs and life companies were brought together for regulation purposes under the PIA, each business type kept the rules of their previous regulators, Fimbra and Lautro.

Fimbra had regulated endowment surrenders while Lautro had not. So, even though firms have been under one regulator for some time, the regulations that they have to follow are at times, at odds with each other. The FSA rule change will correct this anomaly in the case of endowment surrenders.

Last year, a staggering £1bn worth of policies were surrendered that could have been sold for more on the Tep market. Put another way, twice as many tradable policies were surrendered than were traded.

With life companies beginning to tell their clients about selling as an alternative to surrender from September, the Tep market is gearing up for an expansion of up to 200 per cent. Market-makers will see their enquiry volumes grow rapidly and it will be those that are prepared to deal with the high volumes that will benefit.

Investment in technology within the Tep market has been growing rapidly in the past few years. This will help smooth the transition of the Tep market from its niche position in to the mainstream.

How will the growth of the market effect policy prices? Policies currently sell for anything from a few hundred pounds over surrender value up to a third over or sometimes more.

The prices paid depend largely on the life company surrender value level when compared with the underlying value of the policy.

Prices are also driven by the levels of investment demand. Investment in Teps has been growing rapidly over the past few years. With the expansion of the market, policy choice and availability should be much greater.

With-profits is a proven long-term investment that can provide (and still is providing) strong returns well ahead of inflation and, for this reason, investment is likely to grow.

The market – and prices available to policyholders who are selling – relies on strong investment demand.

In the longer term, therefore, prices will depend on market-makers&#39 ability to generate increased demand from investors.

With demand currently considerably outstripping supply, all the signs are that there is quite a way to go before oversupply begins to become an issue.

What does the rule change mean to IFAs? Policyholders who go directly to their life company for a surrender value quote will be provided with information on the alternative options. They will not be given advice.

Many policyholders were sold their endowment by their mortgage provider and do not have an existing relationship with an IFA. IFAs who track these people down and help them through the endowment maze are likely to get repeat business opportunities and referrals as a result.

IFAs are already beginning to see an increase in enquiries and this is set to grow considerably. Review-ing all the options and helping clients make an informed choice adds real value. The table below on this page shows the main alternatives.

The less popular options of making a policy paid-up, taking a loan against it or surrendering part of the bonuses can be suitable for specific needs while allowing the policyholder to reap the benefits of keeping the policy until maturity.

For mortgage endowments, the options should be considered alongside remortgaging options. A popular option in a potential shortfall situation is to switch part of the mortgage to repayment.

Increased focus on the Tep market requires greater attention to providing a clear compliance trail. Evidence that advice has been given on all of the options available, together with a clear reasons-why letter, should be kept on file.

For cases where the client has decided to sell the policy, evidence of a market search for the best price should also be kept. Endowment trading platforms such as freetrawl. com provide league tables of prices which ensure this req-uirement is met.

IFAs will have to become more efficient in dealing with the Tep market.

Online endowment services that combine automation technology with market expertise are proving to be highly valuable tools for IFAs who are coming under increasing time pressure.

They also make the market more efficient for market-maker companies buying policies by allowing greater integration of technology, reducing the need for human intervention. This speeds up the valuation and sales process as well as allowing the necessary compliance paperwork to be generated on request.

IFAs are increasingly making use of their websites to generate and process endowment sale enquiries. As more such sites grow, customers are generally requesting sales quotes from at least three sources. To get the business, IFAs not only have to be efficient but also need customer communication skills that are superior to their competitors.

Many IFAs have shied away from personal contact for customers who approach them via their website, preferring to rely on automated email communication. But experience is sho-wing that the most successful IFAs are those combining the best bits of new technology with their core skills of financial knowledge and traditional customer communication methods.

Now is the time for IFAs to ensure they are geared up to deal with an increasing number of endowment enquiries and to reap the benefits.


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