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The churning tide

The FSA wants action taken to stem churning but is it always gratuitous?

Churning has never been so topical. Ned Cazalet’s original Polly Put The Kettle On report has been picked up by FSA chairman Callum McCarthy. He worries that the distribution model may not be working for anyone – insurers, advisers or clients – as policies are switched regularly for higher commission. There is an implied threat of regulatory action if the industry does not take action itself.

The FSA wants insurers to take action against what might be called persistently offending advisers. Prudential, only a few weeks before and clearly with knowledge of the way the wind was blowing, had announced just such plans. Some life offices were heard to say this was nothing new – they had been doing this all along and wondered what all the song and dance was about.

Some insurers agreed vocally with McCarthy, most notably Scottish Life. But at the Labour party conference, ABI director general Stephen Haddrill challenged McCarthy’s thesis. There are now murmurs about splits in the ABI, with some offices prepared to pay high commission and others wishing to move away from it. Listed insurers are facing tough questions from City analysts brandishing the Cazalet report and there is talk of exasperated foreign parent companies demanding to know is going on in the UK.

Haddrill might have got his point across better if he had described the practice as switching rather than churning. Much discussion surrounds what constitutes churning. This may be where IFAs come in. Surely there is good churning or should that be switching and bad churning?

IFAs will, for example, be moving clients on to new platforms and into simpler and perhaps cheaper structures. In most cases, it must be possible to demonstrate best advice and, if any commission is shared and costs and charges are not disadvantageous, what is the problem?

Then we assume there are cases – as one IFA wrote about last week – where moving a client brings extra allocation and proves profitable for client and adviser, particularly if commission is shared. Should an adviser be condemned for this? Best advice is an individual thing and it is not designed for the greater common good.

Of course, there may be some IFAs who have developed a bad churning habit.

One adviser says he believes some salesmen have moved from the tied environment to become IFAs. In the process, they profitably revisit old clients and move them out of their old contracts, whether or not it is the correct advice.

This could be gratuitous churning and, if it is bad for clients, it must be an issue.

Even a casual glance over the last 10 years of financial services history shows all manner of reasons for that switch or churn. Differences in performance between with-profits funds are striking. The move to stakeholder charging on many contracts and pension simplification are two more examples. The move to open architecture is another and the closure of funds yet another. Meanwhile, the regulator talks about shopping around.

Some of this movement is the responsibility of the Government, the regulator, product changes or market conditions. Some movement is a reflection of how life offices determine their policy for getting new business and retaining it with levers such as commission and clawbacks. One of the biggest life office’s commission terms have been on a rollercoaster ride for years. Is there method in this strategy? That is a question for the board of that insurance company.

If it is a system played by IFAs for their clients, why are they at fault?

What will the regulator do as it surveys this debate? We can only hope it does not come to simplistic conclusions. You can knock advisers if what they are doing is detrimental to their clients but, if it is not, then the life offices themselves need to fix things themselves.

One last point on McCarthy’s speech. He made reference to massive losses among the top IFAs. But regardless of some of the poorly constructed business plans and models used by some now departed networks, many IFAs are doing well. Has the regulator got its wires crossed? Bad advice is one thing. Predatory pricing may also be an issue but surely one for the OFT. Ultimately, provided the FSA ensures disclosure of the correct information to the market, aren’t shareholders the best regulators?

John Lappin is editor of Money Marketing

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