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The state of pay

Scottish Equitable head of business development Steven Cameron assesses the radical plans set out by the ABI for changes to adviser remuneration.

Adviser remuneration is again under the spotlight following Charles River Associates’ Study of Intermediary Remuneration’.

This report, commissioned by the Association of British Insurers, is part of the ABI’s initiative to improve consumer confidence in the industry, after criticism from various sources, including the Treasury select committee.

The ABI asked CRA to analyse various aspects of commission, with particular focus on consumers, taking into account the impact of depolarisation and the payment menu before proposing any improvements of mutual benefit to all stakeholders – consumers, distributors, providers and regulators (FSA and Treasury).

This multi-stakeholder focus is welcome but it is pointless coming up with a perfect solution for consumers if providers and distributors will not produce or distribute.

The report vindicates advisers by confirming that commission bias is more perceived than real and paying for advice through commission rather than fees delivers many benefits to consumers but may also raise concerns for advisers over some proposed changes to commission structures.

CRA found that although commission is earned only if a product is sold, commission-based advisers do not “oversell” compared with fee-based advisers. There is no evidence of widespread commission bias at provider or product level, with only a few isolated examples.

It proposes that the industry should move to a simplified set of commission structures, ideally one per pro- duct. If two products meet the same customer need, they should have the same commission structures. One issue here is that a product may be used for a range of requirements. Providers could continue to compete on levels of commission paid within these structures and to offer enhancements where commercially appropriate.

CRA also believes simplification of commission structures will benefit the menu, which currently has to contend with a wide range of structures. The adviser shows his maximum commission in his most typical shape and compares this against a market average of equivalent shape. This is a big step forward and allows the consumer to compare his maximum against a meaningful benchmark. CRA says the downside is that two advisers may show the market average in different structures, making it difficult to compare across menus.

It investigated whether advisers chose to take all commission up front or opted for some trail or renewal commission. It found no connection between the structure chosen and whether the client had indicated they wanted ongoing advice.

This led it to conclude it was difficult to identify what elements of commission were for initial advice and which were for ongoing services. Some IFAs might present renewal or trail commission as deferred initial commission and covering initial advice, leading to confusion.

CRA proposes that payments for ongoing services/ advice should be shown separately. The amounts would be disclosed on an annual basis with analysis on whether the provider or adviser should be responsible. This would allow consumers to consider if ongoing service warrants this payment. If not, they could ask for it to be rebated to their policy or paid to a different adviser.

The report talks about consumers who may become orphaned if their adviser multi-ties and their product as it falls outside the multi-tie range. In such circumstances, the CRA proposals make a lot of sense.

As part of introducing their menu, advisers should be thinking about how to present their services and the associated costs. This should cover initial and any ongoing advice, so the menu may begin to resolve this issue.

The extent of ongoing payments can vary significantly. Where the amounts are small, the costs of disclosing may exceed any potential consumer benefit. For some products, such as income drawdown, CRA points out there is always a requirement for ongoing advice, meaning there should always be an element of trail commission.

The most contentious proposal is the abolition of indemnity commission, wrongly presented by some as an end of all initial commission. To some extent, this ties in with a move to fewer structures. It avoids providers competing on initial earning periods and discount rates. Paying all initial commission on day one does align the timing of adviser remuneration and initial advice costs.

On the other hand, in an era of no or limited front-end charges, it is capital-intensive for providers. CRA also has concerns that the more up-front the commission, the more likely it is the consumer will be advised to move regularly to alternative providers.

If indemnity commission is scrapped, CRA highlights the need for an alternative mechanism to help with transitional cashflow issues.

Interestingly, CRA is not against an element of up-front charging. It sees merit in the FSA removing the reasons why not stakeholder (RU64) rule and the introduction of modest up-front charges. This, with initial commission paid over a reconsidered initial period, would balance persistency risk more equitably between provider, adviser and consumer.

The final proposal relates to fees and whether advisers might be prepared to accept fees in instalments, similar to spread initial commission. There are admin and VAT issues but it may make fees more attractive to consumers.

Some commentators say we should wait to see the impact of the menu before considering further changes to remuneration and I sympathise but advisers might want to reflect on the findings when considering their advice proposition and how best to describe this in their menu.

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