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The churning point

FSA chairman Callum McCarthy has called for urgent change to financial services distribution models, which he says are failing consumers, advisers and providers.

Speaking to savings and pensions industry leaders, McCarthy criticised commission bias and provider incentives, which he claims are causing detriment to consumers.

On the issue of churning, he 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.

“Provider bias is clear. I am struck by the prevalence of examples of providers managing demand – up or down – by adjusting commission which can lead to less suitable or unsuitable sales.”

Many have taken the speech to be a warning to the industry that it must address the issues raised rapidly if it wants to avoid further regulation to force such changes through.

Personal Finance Society public affairs director John Ellis says he had been expecting the FSA to take a firm line for some time and welcomes McCarthy’s views. He says providers need to show more innovation and provide a choice of remuneration structures for consumers and advisers.

Ellis says the current model is too homogenised and providers need to come up with a way of moving without losing IFAs in the process.

He wants the FSA to ensure these issues are addressed in its retail distribution review as he is not confident that the industry can come up with the solution by itself.

He says: “There is a question mark in my mind as to whether the industry will take action quickly enough. We have been debating these issues for years and not doing anything about it. I think the FSA will have to force this and push it very hard. We have an unfortunate dependence on regulatory rules again.”

Standard Life chief executive Trevor Matthews says it is the role of the providers to offer a range of models and platforms for advisers and consumers. He does not favour a cohesive approach from providers, saying that this would be unnecessary and anti-competitive.

Matthews says: “Over time, people will realise that these new business models do make sense and providers will adapt. We will see more visibility, more transparency and an ongoing relationship type of model.”

He believes McCarthy’s speech is a warning to the industry to accelerate the pace of change or face potential action from the regulator but he says a certain amount of churn is to be expected afterA-Day.

Matthews says: “A-Day has actually changed the world and it does make sense for customers to review their pension provisions. Churn is essential and inevitable in a certain amount after A-Day.”

Aifa director general Chris Cummings says the industry must take the lead if it wants to avoid the FSA stepping into enforce new business models. He says: “At our peril, we invite the regulator to take more power. I completely resist calls for further regulation of our market. The FSA’s approach is correct as it has left the industry to come up with a solution.”

Cummings says it is encouraging the FSA is instigating an open debate and he would like to see the industry come up with a co-ordinated, wide-ranging response. He believes IFAs should join with consumer groups to produce a response.

Prudential recently announced plans to address churning by looking at advisers with unusually high levels of transfer business and to consider whether to sever their agencies, cut future commission payments or report them to the FSA.

Intermediaries director Tudor Taylor says: “The sense of momentum building across the industry is tangible and it is something that we have not felt before. There is little disagreement that we need to move the model on. Feedback over the last few weeks from advisers and providers alike demonstrates a definite desire to crack the churning issue and bring about a change that integrates customers’ interests and treating customers fairly into a workable distribution model.”

Informed Choice managing director Nick Bamford has a more controversial view. He believes providers will eventually control distribution and few IFAs will be left in a few years.

Bamford says: “Product manufacturers will seek to control distribution by having their own salesforce because profit is to be found further down the distribution chain. It will be a new version of the direct salesforce who will be very professional and highly qualified.”

Scottish Life head of communications Alasdair Buchanan disagrees with McCarthy’s view that the current system does not give good value to consumers.

He says: “Providers are effectively funding the unsustainable charging structure. The provider is selling £10 notes for a fiver and there is no way we can continue to operate on this basis.”

Buchanan would like to see further clarification from the FSA on what the problem actually is and, in his view, the blame lies with those providers which do not price their products in a sensible manner.

McCarthy ended his speech by putting the ball in the providers’ court.

He said: “The principal responsibility for the business model used by firms lies with the firms which use it. I have identified a number of severe failings in the present model which make it appear unattractive to providers and consumers of financial services.

“I have set out what the FSA intends to do. I will be very interested in seeing whether the industry can develop a full and appropriate response, something which would appear entirely in keeping with their repeated statements about their wish to improve their brand and their performance.”

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Welcome to the latest edition of In Focus. In this issue, Jelf examines the private medical insurance market for employers with expatriate workforces in Germany. This includes the common challenges faced in sourcing appropriate coverage, along with a selection of available solutions. This will be of particular interest to HR/reward decision makers with employees based in Germany. It will assess the cultural norms, risks and backdrop that are relevant to organisations with expatriate staff in this location.


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