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Remuneration
When it comes to remuneration, the key point from the Interim Paper is a challenge for providers to step away from determining advisers’ remuneration in the Advice channel. Hot on the heels of this challenge was the (thinly) veiled threat that the regulatory response will depend on how providers respond to the challenge.
The Interim Paper is quick to point out that the FSA does not seek to end the practice of providers advancing payments to advisers in the expectation of future charge income (“factoring” in RDR terminology). However, the FSA appears to be leaving the door open for limiting the approach taken to factoring once they have investigated how this affects the risk of provider and product bias.
Group pensions are specifically mentioned in this section of the paper, which puts to rest the myth that it was out of scope for the RDR.
Although some market commentary might suggest CAR has quietly gone away, the reality is that CAR is here to stay.
Scottish Life's view
We wholeheartedly concur that providers setting adviser remuneration can cause, or at at the very least can give the perception of provider bias. Our view is that CAR hands much more control to advisers, as it lets them put a price on their services rather than have a provider value (arbitrarily) the work the adviser does.
We believe the only practical mechanism for adviser remuneration through a product, but without provider involvement, is some form of Factory Gate Pricing with ‘matching’. Matching means that £1 of payment from provider to adviser must correspond to a £1 charge within the product. This is akin to how the pensions market already seems to be moving, with use of our own Financial Advisers Fee, for example, increasing from 80% to 90% of individual pension new business in the last two years1.
Some flexibility is required in terms of factoring, particularly for regular premium products. So limited factoring, over a period of up to 5 years, could work well to improve early surrender values. This would effectively act as a commercial loan from provider to adviser in lieu of (and conditional on receipt of) future charges. But this requires an industry prescribed basis to avoid provider bias by the back door. Leaving the persistency risk of advice with providers will still cause, or at least continue the perception that there is unnecessary movement in the markets, the cost of which is ultimately borne by consumers.
For many advisers, this change from a traditional commission model to CAR (or whatever it ends up being called) could seem like a large leap. Providers, particularly those that don’t have to fret about changing their own business practices, will be able to help you make that transition, with material such as our Business Toolkit.
Group pensions should also operate on a CAR basis as the problems found in the individual savings market are just as prevalent in the Group sector. This requires the FSA to recognise employers as representing the client for a Group pensions arrangement, so enabling remuneration discussions to take place with the employer whilst the adviser firm’s lesser-qualified staff are able to enrol employees.
There will always be scope for providers to be clever with their product charges, to try to hide or offset charges for CAR payments. We expect that the FSA will use TCF principles to challenge charging shapes that don’t conform to the spirit of CAR.
1 Scottish Life Press Release (14/07/2006) - Scottish Life's FAF increasingly popular with IFAs
Scottish Life Press Release (14/03/2008) - Traditional commission models not sustainable says Scottish Life
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