04/05/2007 - Davy's Comment on ABI’s Draft Proposals

So now we know!!  Captain Blackadder and Baldrick are alive and well inside the hallowed halls of the ABI and they have a “cunning plan” to recapture control of distribution for the insurance companies.  However, thanks to a leaked document from the ABI their dastardly scheme has been revealed in all its glory. 

First they intend to persuade their friends at the FSA to create a barrier to entry by dramatically increasing the capital adequacy requirements of IFAs.  Secondly they want the FSA to ban the payment of commission to IFAs and multi-ties.  Thirdly they want the FSA to make it much harder for IFAs to receive trail commission.  Finally, they want the FSA to ensure that none of these requirements, and most of the current ones, DO NOT apply to their own direct sales forces. 

These are the most myopic and biased set of proposals I think I have ever seen.  The control of distribution by product providers has always led to higher costs and less choice for consumers whether it has been through DSFs, tied agents or estate agents.  Against this the IFA sector has consistently delivered choice and value to consumers whilst generating dramatically fewer complaints and much greater client satisfaction.  The reality is that the IFA sector with over 60% market share, is successful precisely because it provides genuine choice and value to consumers and with two thirds of IFA clients being C1 or below this applies across the social spectrum. 

Bizarrely the ABI’s draft proposals are not even backed up by the evidence in their own paper.  It is as if they have decided that to restore product providers profits they need to virtually eliminate the IFA and multi-tie sectors and bring back DSFs.  Having decided on the outcome their proposals demonstrate a blatant disregard for both their own research and consumers.

No doubt the ABI will protest that this was only a ‘draft’ but it was produced barely two weeks before they intended to make their submission to the FSA and states it is after on wide consultation with ABI companies.  It also proudly boasts that the paper is intended to influence the FSA Discussion Paper and that it adds considerable detail to their first response to the FSA last December!

What is clear from the paper is their frustration at the success of the IFA sector and disappointment at the decline of direct sales forces.  It offers no evidence whatsoever to suggest that IFAs are not doing a good job for clients.  Indeed it reluctantly concludes that there are very sound reasons for the success of the IFA sector.  One being that direct sales forces are too expensive to run whilst another recognises that “customers…need to have the options carefully explained to them.”

It also refers to “Demand side barriers” and that insurers find it “uneconomic to attract consumers”, both of which translate to the fact that people do not queue up to buy life insurance or start saving.  Most people know they should protect their families and save for the future but it is rarely right now, rather it is something they will do after their holiday or after changing the car.  The reality is it needs the advice and guidance of an adviser to encourage them to take action and whilst insurers may not be able to deliver this, IFAs most certainly can.

On commission, the paper talks of the perception of bias but acknowledges that there is little evidence of consumer detriment.  Indeed it points out that commission can bring significant benefits to consumers.  It also refers to “factory gate pricing” but highlights the fact that though it has been around for more than a decade it has had virtually no impact apart from on certain very wealthy clients.  All of which is information the FSA would do well to take careful note.

Inevitably it refers to the hoary old chestnut that IFAs are mostly small and under capitalised.  It then helpfully points out that it has been the big firms that have collapsed and created the burden on the FSCS.  In this context it goes on to make the ridiculous assertion that smaller IFAs cannot afford to pay the FSCS levy when the fact is that IFAs have being paying it from inception and continue to do so.  The argument about the FSCS is not about affordability but about the obscene unfairness of the current structure which penalises IFAs who have no possibility whatsoever of influencing the outcome.  In my view it is about time the ABI and the FSA recognised this reality and put right what is a disgraceful injustice.

Taken together or in isolation the proposals contained in the ABI’s draft document are a blatant attempt to control distribution to the detriment of consumers and IFAs.  The facts and their own research do not support their conclusions and if introduced would lead to massive consumer detriment and zero gain apart from, of course, adding to life company profits.

The financial services sector is not perfect however almost 20 years of regulation has seen great progress.  Proposals such as these demonstrate that insurers have learned nothing from the past and given half a chance would take us back to the very world that led to regulation being introduced in the first place.  I think even Baldrick would find that pretty astonishing.

Ken Davy

Chairman

SimplyBiz PLC