Britain's financial watchdog is set next week to propose a shake-up in the way people buy life insurance and investments, with a long-awaited review that will call for changes in commissions and better advice for customers.
The Financial Services Authority (FSA) launched its retail distribution review in June last year and will publish the outcome of its work on June 27. The regulator has expressed concern at how the life, pensions and retail investment market works and launched the review last year in a bid to find ways to improve the business.
Britain's insurers have come a long way from the doldrums they hit in the early 2000s, when a combination of tumbling stock markets and falling bond yields battered popular "with-profits" funds and left the industry's reputation in tatters.
But some key concerns remain, including the lack of clarity around financial advice and over its independence and the concern that only a fraction of sales reported by insurers actually represents new business, with the rest being recycled business shifted between firms.
In September, FSA Chairman Callum McCarthy said the current system of commissions paid to sales advisers, which focuses on remunerating them according to the volume of business they deliver to insurers, created a "merry-go-round" that hurt customers as well as firms' profits. The review has looked at issues including commissions, the industry's focus on volume over quality, the high turnover of life and pensions policies, the issue of reputation and the sustainability of the financial advisory firms that currently make up the bulk of UK life assurance sales.
"It's not that the market is broken, but there are some areas that are not working as they should and are in need of repair," said Alex Roy, assistant director of retail distribution at the Association of British Insurers.
The FSA is unlikely to scrap commissions, saying it wants the industry to agree a solution that will meet the watchdog's dual objectives of making the market more efficient and treating customers better.
The ABI has called instead for a "factory gate" pricing system under which the price for advice would be set by intermediaries and would not depend on providers.
"I don't think we need to be afraid of selling in this industry, but if you are getting independent advice and you want to have confidence that advice is independent, commissions can hide the costs, making it less clear and trustworthy," Roy said.
Others said the FSA could encourage, or oblige, providers to report "net new business", separating actual new sales from recycled business to allow a clearer view of insurers' performance and lessen the preoccupation on the quantity, rather than quality, of products a firm has on its books.
The advice sector itself is expected to come under scrutiny, with industry figures calling on the FSA to push for better labelling, to separate truly independent from "tied" advice, and for better professional standards. There is currently no single, industry-wide qualification for independent financial advisers.
Market participants have largely welcomed the FSA's review, though the practitioner panel, which represents firms regulated by the FSA, warned the regulator last month not to ditch the current distribution system without "being able to propose a viable alternative".
The FSA's review will be followed by a period of at least six months during which the watchdog will receive feedback to its proposals before it drafts final recommendations on how the market should change. But the review's findings will kick off a period of soul-searching about the future shape and direction of the market.
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