CA Summit 2008: Retail Distribution Review and recession will increase pressure on commission market

A combination of a potentially long recession and the progress of the Retail Distribution Review are expected to increase pressure on the commission market, pushing more firms towards fees.

But many advisers at the Corporate Adviser Summit expect commission-paying providers to carry on offering remuneration packages similar to those on offer today.

John Lawson, head of pensions policy at Standard Life, pointed out that his firm was only too aware of the potential value destruction caused by writing group pension business on an upfront commission basis. He said that Friends Provident has experienced similar funding issues and he expects the remaining few insurers taking on this business are storing up future problems.

“Capital is definitely becoming tighter and commission is very capital intensive. If you price business on a single charge basis, breakeven is six to seven years and if you factor in commission it goes up to 15- 20 years,” said Lawson. “The single charge business we wrote in 1999 came off the book in droves when the clawback period ended in 2003. A lot of companies in the market have still to book the penalties for writing this business. The change has to be provider-led and capital will be the driver.”

But despite the persistency issues that are currently affecting the industry, not all insurers say that churning is a major issue.

Scottish Widows employee benefits and direct distribution director Andy Barton said his company’s experience of churning among top end-end corporate advisers was “non-existent”.

He said Widows has seen an increase in the number of intermediaries adopting a fee-based approach but said the insurer will continue to offer a range of remuneration structures to support advisers and their clients.

“As a provider it is not our place to take a moral stance and we have no plans currently to switch off any of the payment options we offer but it all depends on whether it makes financial sense to us,” said Barton.

The issue of commission remains divisive, however, with advisers also split on its merits.

Michael Whitfield, managing director of Thomsons Online Benefits, attacked the RDR as a “thinly-veiled way of getting rid of commission”, while John Sansone applauded “some sanity coming back into the market”. Whitfield accepted that the long expected lead time of the RDR, which the panel felt wasunlikely to come into force for corporate business until 2014 or 2015, if indeed it is extended to business to business relationships, enables advisers to plan ahead. But he argued that the industry needs to work together to build standardised alternatives, such as factory gate pricing, before there is any blanket ban on commission.

He said: “It is wrong to look at commission in isolation – you need to look at adviser remuneration as a whole. Good advisers know they need to build a diverse range of revenue streams into their business to be bomb-proof but providers cannot sit there blaming advisers, there needs to be a partnership. Let’s agree how factory gate pricing is going to work and make it a standard people work towards so we can move on and innovate. Otherwise, we will all be fighting for a smaller piece of a smaller pie.”

Sansone pointed out that Towry Law is transitioning all of its corporate clients over to a fee-based model and said clear and open conversations are required to make this work.

Although some clients will oppose the move, he stressed it is “fundamentally right”, will raise standards in the industry and remove any potential conflicts of interest.

Payment from within the contract is tax-efficient, Lawson noted, but he stressed that the cost has to be explicit to both the employer and employee. He said there could also be issues if the employer is taking advice funded by the employee unless staff are allowed to opt out of this.