An open letter to the FSA
The decision to depolarise sales of stakeholder pensions is being taken without consideration of the consequences. The intention is to make available any stakeholder pension (SHP) via direct salesforces which may be offering their own in-house plan.
A salesperson for a bank who offers the bank's own SHP could also offer the product of any other SHP provider. The matters which need to be considered are compliance issues.
The potential cost of setting up and administration is such that it is generally accepted the providers will have to wait on average 10 years before they move into cashflow.
The average current payment into a personal pension plan is well under £100 a month. It is likely that new pension take-up will be limited to distinct classifications of subscribers. The Government's target market is the £10,000 to £18,000 a year earner not at present subscribing to a policy.
If these people can be persuaded to invest out of their very limited surplus income, then the average premium will be lower than the average paid in to a pension now. Cost ratios to the provider will be very high and the product unprofitable The other class of policyholders will be wives and children of the very wealthy who will take advantage of the generous tax position as tax relief is given on the premiums regardless of the fact that no income was earned. These policies, fully funded to the £2,800 maximum a year after tax relief, will be very profitable to run and a marvellous tax break for the rich.
The FSA considers that, as the main users of direct salesforces are the poorer members of society and only the richer have access to IFAs, it follows presumably that the poor will buy their SHP from the DSF. The richer will seek advice from an IFA. Providers selling chiefly through IFAs will get the profitable business and the DSFs the less profitable.
This above premise uses the FSA/Treasury's own interpretation as to why polarisation needs changing.
Now for the problem. Let us assume the client visits a bank to buy a policy. The salesperson advises the purchase of a plan. He can sell either his own in-house plan or any other provider which his company has in the portfolio.
The entire sales process will be open to manipulation over the choice according to commercial factors. Is it not likely that any small size of premium which the managers deem to be less than profitable to the company will be directed towards one of the other providers which is powerless to prevent from being selected against as the SHP rules enforce the acceptance of a minimum of £20 as a payment? The other “guest” providers could find the DSFs will sell their own bigger-premium plans in house but pass on the unprofitable little ones to other providers It gets worse. Imagine the salesperson acting strictly according to “best advice”. The salesperson considers the client risk profile and decides the best policy for the client is not the in-house policy.
Are we to assume there will be no differentiation between the remuneration of the salesperson, which will favour the sale of the in-house plan, especially where the expected premiums are profitably high?
The only way such distortions can be avoided is either to leave polarisation unchanged or to insist that all salespeople must be totally independent to sell on on the basis of best advice.
It must follow there must be no remuneration bias to persuade the use of one plan over another on the grounds of differences in remuneration.
Let us consider another claimed reason for the need to depolarise SHP sales.
It has been suggested a problem arises where a person has a SHP and needs another one because of new circumstances, job change, etc, making it necessary for high-street providers to be able to advise over a switch from one plan to another. They cannot do this at present but depolarisation will permit it.
Why the need? The only charge is 1 per cent a year so if the client needs another plan there is no reason why he should not terminate payments to the old one and start a new one, leaving the old one invested. The charges will not change.
The truth will be rather different. The Government and the FSA believe most SHPs will be started as a result of the use of decision trees. It is, however, more likely that sales will be via the workplace.
The entire rationale behind the phoney claim that stakeholder sales must be depolarised has no worth.
The spurious suggestion from the FSA that there is a sharp divide between independent and tied advice along the wealth dividing line is curious. Each channel is available to the wealthy or less so, according to personal preference.
This is clearly illustrated by recent events at Equitable Life. Most of the clients of that now closed company were on the rich side of the wealth divide. Events here show clearly the need for independent advice.
The regulator and the Treasury ignored the warning signals and made a major and costly mistake here.
Polarisation changes are likely to be an even bigger mistake, taking us back to the pre-1986 regime.
Maybe the process of polarisation needs to be carried to a logical conclusion , with all advisers having to be independent acting purely for their client.
It is indisputable that the trend of volume of business written by tied salesforces is in steady decline.
The present system works too well for wholesale change to be justified on account of a whim of the Government.
So what changes need to be made? I suggest the following in the interest of fair competition and, above all, consumer protection.
All advisers who provide advice to be independent and able to advise freely on all and any financial product. All advisers to have to be sufficiently well trained to achieve this. Special categories of advice to be established requiring suitable qualifications or evidence of competence for business categories requiring more advanced skills.
All financial products to be quoted without any commission charge apart from perhaps industrywide agreed trail commission to ensure continued advice. The remuneration rate to be negotiated in every case at the point of sale with the client and this sum added to the policy charge and paid to the adviser on an industry agreed menu of remuneration.
Emphasis should be on commission spread throughout the contract with part initial indemnity rather than all up-front indemnity commission.
The job of the adviser is to provide ongoing financial advice to the client. How can a salesperson working for one company do the job properly for the client? If all salespeople were IFAs, the problem is solved. It would sit comfortably with execution-only business, off the page and the internet.
The only argument against is that the job of the FSA might be harder. It would also upset vested interests who want to run their companies free from competition.
Surveys demonstrate that the majority of the public want independent financial advice. What right do politicians have to compromise it?