Insurers mull fee reforms

Insurers mull fee reforms

The Association of British Insurers will call today for the abolition of upfront commission - blamed by many for the mis-selling of endowments - in a report likely to horrify Britain's 20,000 independent financial advisers.

Upfront commission allows advisers to rake in thousands of pounds from the sale of even low-premium products. This is because the insurance company assumes the consumer will pay for the product over 20 to 25 years, but rolls-up the commission into one lump sum paid to the adviser as soon as the product is sold.

Financial advisers rely on upfront commission for most of their income but the alternative - paying for services via fees, as with solicitors - has not taken off. Instead, the ABI proposes today to replace upfront commission with a mix of initial plus "level" or "trail" commission, which is only paid if the buyer maintains premiums over time.

Advertisement starts

---

---

Advertisement ends

The report, prepared for the ABI by consultants Charles River Associates, also calls for standardising commission to stop biased sales of one type of product over another. For example, with-profit bonds are pushed more heavily by advisers because they pay commission rates of 5-8%, compared to 3% on a unit trust.

The ABI chairman, Richard Harvey, who is also chief executive of Aviva (owners of Norwich Union), said: "We are serious about improving confidence in our industry and in saving ... the commission issue goes to the very heart of that."

But the Competition Commission will be concerned at any attempt by the ABI to set industry-wide commission levels. Until the late-80s, commission levels were pegged under a gentleman's agreement called the "maximum commission arrangement".

But the agreement was ruled illegal by the competition authorities, which believed that rates would be forced down if competition was introduced. But the reverse happened: commission rates soared as insurance firms bid for the business that IFAs could introduce.

But the ABI researchers "found some limited commission-related bias towards particular companies and product types but no evidence that commission was inducing advisers to sell where no sale was appropriate".

It added that abolishing commission altogether "would jeopardise access to advice for middle and lower-income consumers without clear accompanying benefits".

Guardian Unlimited © Guardian Newspapers Limited 2005