It’s not the FSA’s role to dictate business models. It should only intervene in consumers’ best interests. Although the FSA is questioning intermediary remuneration we must not make a rash decision to scrap commission – this isn’t a simple choice between it and fees.
Commission isn’t perfect. Under the Insurance Conduct of Business rules the commission for protection sales doesn’t have to be disclosed. This allows critics to make the point that, unlike fees, commission lacks transparency. Too often people don’t understand how much they are paying under a commission structure whereas with an upfront fee it is obvious.
This lack of clarity muddies the waters about who the intermediary acts for, the client or the insurer. Some claim that commission can lead to product and provider bias. But this is more about disclosure than commission.
When it comes to protection sales, we often forget that commission offers consumers a good deal. There is no need for an upfront fee, which can be a barrier to people getting advice at all.
Most protection sales are associated with arranging mortgages for which upfront fees are already added in. Arguably, in mortgage-related cases, a fee for protection advice could also be added to the loan. However, while this would spread the cost like commission, the consumer would end up borrowing more . And let’s not forget that commission is not subject to VAT.
One important aspect of commission is consumer protection. If a consumer is unhappy with the advice or the product recommended they can stop paying the premiums. If they do this early, at least part of the commission can be clawed back from the adviser – not easily done with fees. The adviser has a vested interest in the customer’s happiness.
Commission allows wider access to advice, reduces the need for extra borrowing, is more tax-efficient and provides important consumer protection. In short, it has got a lot going for it. Let’s hope the FSA doesn’t throw the baby out with the bath water.