This is interesting. I have just come back from the USA where I was attending a Committee meeting of MDRT which, as most folk know, is an international organisation of financial services professionals from 72 countries, committed to professional excellence and ethical business methods. Of all those countries represented, the UK has the highest number of IFAs, and co-incidentally the highest "persistency ratio", that is, business staying on the books. Of course, we also have the lowest charged products anywhere on the planet, bar Australia which is similar to us.
It seems the insurance companies, left to their own devices, enjoy the fact that, unfettered by the demand for lower-charged products which the IFAs require, they can rely on the policy-holder lapsing the average policy every 7 years enabling the company to re-sell another with a further set of high initial charges just as they used to in this country before the rise of the IFA and the demand for fairer product terms.
The UK regulator is as we all know heavily dominated by banks and life companies who have many things on their agenda, however one of them is NOT the survival of the IFA sector which is probably the lone way by which the public stands a chance of obtaining impartial advice with, if appropriate, the sale of an appropriate product with competitive charges. Indeed, it is not in the interests of banks and insurance companies for us to survive, so a regulator mainly dominated by such folk is to say the least, a serious worry.
Passing on the distribution costs to IFAs with, if appropriate, a larger commission does at least enable the insurance company to predict it's distribution costs. Usually a larger commission is simply a reflection of a volume discount, something which applies in every other area of commerce. It rarely (if ever) is taken from the product but rather is taken from the insurance company's own retained costs.
Secretary, Toptrak IFA Study Group
02920 650 662
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Sent: Friday, January 28, 2005 10:22 AM
Subject: FSA warns of high cost of small IFAs - Please tell me how paying more commission reduces provider costs..
The feeding frenzy displayed by the providers in their attempts to secure distribution involves the use of massive lump sums and anti-competitive commission levels, please tell me how that reduces their distribution costs when you add the fact that they are also responsible for the compliance costs. It won't work, it really won't work here any better than it did in Oz.
Alice in Wonderland strikes once again, when is common sense going to prevail? Or is the use of this attribute precluded under the mountain of mad regulatory rules?
FSA warns of high cost of small IFAs
PROVIDERS forced to rely on small IFAs rather than multi-tied agents could face higher distribution costs, according to the FSA.
In the City watchdog’s Financial Risk Outlook report for 2005, the FSA claimed insurers unable to secure distribution through the new multi-tied sector in the depolarised world might face higher distribution costs.
The 92-page report said providers who failed to secure multi-tie deals and became more reliant on a large number of small IFAs as a result were most likely to see distribution costs escalate.
Evan Owen, director of the IFA Defence Union, said he would like to know how the FSA arrived at this assumption, given that 50 per cent of the market was made up of small IFAs.
He criticised the regulator for only paying mere lip service to IFAs despite the size of the industry.
Advisers were mainly covered in the final two pages of the report, which was published last week. Questions were also asked about the FSA’s failure to take into account the risks created by providers
dropping their appointed representative distribution channels in favour of multi-ties.
Mr Owen said it seemed illogical for providers to turn their backs on a channel where they could possibly control compliance in favour of distribution in a multi-tie market where they had no way of
He said: “The FSA insists that an unincorporated IFA carries liability for life and beyond.
“Networks are one of the greatest risks to both the industry and the Financial Services Compensation Scheme.
“Too many small IFAs have found out to their cost that reliance upon the network to do the right thing is naive in the extreme and when a network goes under it makes a mockery of the statement that
small IFAs existing in the market will put pressure on the FSCS.
“Once again we see the last few paragraphs of an important document being devoted to the distribution channel [IFAs] that accounts for the lion’s share of retail distribution.
“We [IFAs] see mere lip service – not very constructive.
“In fact it is simply another attempt to decimate a profession by stealth.
“Is this pandering to the whims of the banks who will once again be allowed to pretend they offer a choice?”