Hats off to the FSA

The RDR ban on commission will stop advisers taking cash from employees without them knowing it says Teresa Hunter

The large print giveth and the small print taketh away, according to the pensions bible… but not when it comes to group personal pensions.

Currently employees pay commission for someone else to receive advice (their employer), and they are never told about it. On this occasion, even the small print is silent.

In most other fields, this would be called theft. Money is taken from lowly-paid shopfloor workers to pay for a service the boss enjoys, in a post-modern version of the Robin Hood story, whereby he steals from the poor to give to the rich.

Furthermore, not all insurers pay the same commission. Some pay humongous piles of dosh. In which case, dare I suggest, employees can unwittingly be paying for an inferior pension, simply because it delivers the highest commission to the adviser? Wash my mouth out.

In the insurance and pensions industry, we call such arrangements obfuscation, but even by its standards, GPPs are in a class of their own.
And the sums at stake for the adviser are not insignificant. Selling a GPP to a company with 100 staff can earn professionals £50,000 up front, topped up by £10,000 renewals dropping in at five -year intervals. Sell a few of these over the years and you have not only made yourself a nice living, thank you very much, but you can then sit back and watch the renewals roll in.

But possibly not for much longer. As part of the FSA’s Retail Distribution Review, the watchdog is proposing banning commission altogether, and forcing advisers to negotiate their own consultancy fee. This would be a realistic bill for work done, and paid for by those who receive the benefit. This means employers must pay for the advice they receive, ditto staff, and all of this must be openly declared.

Cue howls of protest from some sections of the pensions world, although it is worth pointing out that many quality firms already operate on an openly declared fee basis.

One might have thought their righteous anger would be assuaged by the enormous concession in the FSA proposals, that the current regime can continue until 2012. In other words, fill ya boots boys, while there is still time, and the renewals will keep you in business for years to come.

To be fair, the protesters’ arguments are not without merit. They claim, for example, that unless it is worth an adviser’s time to sell a GPP he simply won’t bother, in which case employees forego an employer contribution to their pension. Furthermore, employers will not pay for advice, and neither will employees (if they are told about it).

Against this, though, employers are going to have to contribute to employees’ pensions when/if Nests are launched in 2012. Ah yes, say advisers, but without advice, companies will only contribute to a very basic ’council house’ pension, rather than a ’four-bed detached’, which advice might persuade them to invest in.

Maybe. But aren’t all these altruistic pleas just a smoke screen? Behind the scenes, pensions insiders admit that very often the wrong group pension is sold simply because it pays the highest commission. End of story. No, for once, ( heaven forefend, I think this may be the first time I have written these words), it’s hats off to the FSA.

The agreement was banned for being anti-competitive, when it provided plenty of scope for commission wars behind a facade of discipline and order.

The watchdog wants to end the system of indemnity or factoring, whereby payments for advice are spread over a number of years. This has
Wherever you stand, the ball is now firmly in the industry’s court. If you don’t like the FSA’s current proposals then your challenge is to come up with a better alternative. You have until March 16 to get your ideas in. The watchdog says it is listening. Could that have anything to do with the pending general election do you think?

Teresa Hunter is personal finance editor of Scotland on Sunday