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The Life Insurance Market
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Peter le Beau makes a point in his MM column, which I think highlights a key misconception amongst those leading provider thinking on how to grow the protection market. I envisage Peter as an expert physician in this field standing alongside the patient’s bed, with undergrads like me hanging on his every word. So it is perhaps bravely and with a small sense of irony that I venture the opinion, that he has looked at a slightly sickly patient and wrongly prescribed an emetic, when what should be prescribed is a bit more ale and pie.
The symptoms are these: protection gaps are huge and despite a current upturn are not being closed as fast or as well as they should be. What growth there is, is being achieved by a supply side boomlet caused by the collapse of the mortgage market, rather than any serious increase in consumer demand. Margins amongst providers are too low and consolidation in that sector has been dramatic and might well continue. That leaves an overcrowded reinsurance market, where the stakes on each pitch grow bigger and bigger and the cautious will soon have to leave the table.
On the marketing front, there has been one exciting debut, but there is no continuous marketing direct to consumers to speak of, except for that selling one dubious product which makes great profit for its distributing providers direct - too little quantity and not much quality.
In short then, the patient is not growing as he should be. Prof Peter’s prescription is that distributors should reduce their margins, though it’s unclear why this would kick start growth. My prescription is aimed at driving the opposite. I say providers should allow distributors to make proper margins, particularly those that do things at scale and properly, as this would allow these to market the products actively and grow the market. That needs providers to ensure that those who distribute their products do so properly. Models which are anti-competitive or irrational should not be supported in search of high volumes. Likewise ones which do not impress customers or retain them effectively should be reformed or dismissed.
Or to put it simply, for a market to flourish its pricing must reflect its marketing needs as well as its costs of production. The UK term assurance market does not obey that rule at all. No distributor of scale enjoys double digit margins and no business without them can invest in growing a market. And in the end it is distributors that must grow a market. So providers need to demand that their distributors market and behave properly and allow the provider proper margins and then pay them to achieve the same.
So Peter, from the other side of the patient’s bed, I would humbly opine that we best follow a basic truth: feed a man properly and he will grow and feed many around him, force him to starve and that’s all that will happen.”
Tom Baigrie
Managing Director
LifeSearch
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At LifeSearch we believe it’s very important for clients who buy Life Insurance to consider writing the policy into Trust. This is because:
- the monies are paid quickly and avoid any probate delays with the inland revenue, which average 6 months
- the money is paid to the right person - the person you nominate as your beneficiary - rather than openly to your estate
- policies written correctly in trust are technically no longer your assets and belong to the beneficiary from the moment the trust form is completed - as such any life insurance payout does not form part of your estate for Inheritance Tax, potentially saving 40% of the sum assured from the tax man.
So we offer a dedicated team whose job it is to get policies into Trust for our clients for free. We believe we are the only independent adviser to offer this service. February and March were two very successful months for our team. Here are a few key figures:
- On average we issued out 460 trusts per week
- Our record was w/c 7th March when we issued 635 trusts
- On average 53% of trusts were issued by email
- On average we confirmed 84 policies in trust per week
- Our record was w/c 7th March with 142 policies going into trust
- Our conversion rate between trusts issued and cases in trust was approx. 18%
Matt Morris, LifeSearch
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A bit of history bought to mind by recent FSA focus on suitability
The Retail Distribution Review
From the Sharp End
Tom Baigrie talks to the Cicero Forum
Thursday 1st November 2007
“All things that men and women make happen have as their genesis the desire of one of them to make a difference.”
The Retail Distribution Review
From the Sharp End
Tom Baigrie talks to the Cicero Forum
Thursday 1st November 2007
“All things that men and women make happen have as their genesis the desire of one of them to make a difference.”
I think Callum McCarthy wanted to make a difference before his FSA tenure ended. He decided to focus his Gleneagles speech and thus the Retail Distribution Review (RDR) that resulted from it on the theory that it is how people are paid rather than how they are led and managed that is the key driver of their behaviour.
As a customer facing distributor; retailer; seller and adviser I know from 26 years of practical experience that this theory is dangerously incomplete. Payment method is part of, but nowhere near the most important part of what governs distribution behaviours. Culture and oversight and enforcement are far more important. If malpractice in business is sought out and punished it fast disappears.
The very first sentence of that speech revealed a deep misunderstanding of the independent advisory culture. My likely behaviour as a 21st century businessman is seen as comparable to that of an 18th century convict ship captain who lets starve and die those in his charge, until his remuneration is changed to reward him for delivering live convicts to Australia, rather than merely taking them on board in that condition.
There is no comparison with our cultures. All but the most crooked advisers seek to profit from long term customer relationships; the very opposite of the convict ship captains. Indeed Callums’ use of that analogy misses a key point - there is now no shipping or careless manslaughter of convicts any more, because it became culturally unacceptable. Incentivisation is far less important than cultural leadership.
The RDR is not about leadership, it is about more rules and an attempt to skew market forces. We have had enough of those already.
Financial Services distribution has been led by Callum and his predecessors for 20 years. If it is “bust”, as he said; it happened on their watch. He should perhaps have considered an apology. Had he thought in those terms for a second, the RDR would look very different.
You’ll see then why I accepted this invitation to speak!.
As I see it I have 25 minutes to explain to this, I hope, influential audience just how bad the RDR really is and how it could be so much simpler and better.
I’ll tell you briefly who I am because it explains why my views are informed and relevant to the debate. I’ll ask and answer some sensible questions and then supply the key to actually achieving what the RDR is aimed at achieving.
Very briefly, I run both a high net worth fee charging financial planner and the UK’s leading phone based protection adviser. We manage several £100m of client assets and separately arrange more than 30k policies of life and other insurances per annum. We’re often IFA of the year according to various publications.
Because of these 2 business models my team of 180 odd, in it’s various parts, gives in RDR Discussion Paper terms, generic advice; primary advice, general advice and professional advice to a customer base very close indeed overall to the national average in earnings and wealth, much of it to ASDA customers; just the sort of people with whom financial services needs to re-engage.
I should be a happy chap! But I’m not, I’m a worried one.
I’ve been regulated from the start in 1987 and in that time I have seen regulation work well and seen it utterly fail. I fancy I know now how to tell which will happen when I read a Discussion Paper.
In simple terms it succeeds when it is acute and focused on a particular abuse. It fails when it is generalist and seeks to achieve theoretical market improvement with a series of new rules, rather than principles. The RDR is the most general piece of rules based regulation I have seen these 20 plus years. Its predecessor in being generalist was the disaster that was and still is de-polarisation.
If you think about it, firms that are, in the broadest sense, like mine, will have to flourish if the RDR is to work and get more consumers engaged and happy with financial services. But I’m in no doubt at all that for a very long period of time the RDR will make far worse the lives of all who seek to properly advise the public in financial matters.
So what is the real need for change? The problem is pretty neatly summarised in the introduction to the RDR DP.
It addresses first the issue that consumers are not broadly speaking capable and confident in making responsible financial decisions at the moment.
It moves on to worry that they are not getting information that is clear. It puts this down to adviser malpractice, ignoring the truth that the complexities inherent in the taxation, benefits and regulated worlds make simplicity impossible. And if it’s not simple it’s not understandable, as even if it is clear, it goes on too long.
Consumers need matters to be put to them very succinctly and that is just not possible now. A regulator’s need for thoroughness has beaten the consumer’s need for brevity.
It totally ignores the obvious and current solution to this problem of impenetrability: having an adviser recommend actions and take responsibility for that recommendation.
Next it addresses a non problem. I would say that firms are generally sound and properly managed and capitalised for their purpose (though perhaps not so for dealing with the EU) and do generally treat customers fairly. There are plenty of exceptions to that general truth of course and these should be being taken on and sorted out individually. That is happening though not effectively enough.
And again with the next concern; current Regulation does seem to me to be risk based and moving towards more principles based regulation.
The thing is not bust at all though it needs better enforcement. But there is a problem arising from those first two points…..
The lack of consumer (and marketing) confidence has created huge “gaps” between what people have and what they should have in terms of all financial provision other than debt. The most pernicious of these is outside the scope of the RDR and has been recently and so far satisfactorily addressed by the FSA’s ICOB team. It is the protection gap. The other gaps, those in savings and pensions are well understood and widely acknowledged by policymakers as bad for people and very bad for society.
Currently, in financial services the poor buy nothing but debt and the rest don’t know what to buy or how to buy it best. The trouble is regulation has rendered profitable provision of good advice to the mass market extremely difficult. Those that try, and I’m one of them, end up in places like this, in a dance with nanny on the head of a pin called, ”Perfecting Advice Models”.
There are two financial services tribes whose success has been completely at odds with Callum’s cry of ‘bust’. It is instructive that these tribes are regulated very lightly, indeed hardly at all. They are the bunch that specifically do not give advice and the one that sells debt. The parallel between not being tightly regulated and not being bust, indeed succeeding rudely, is one all policymakers should study closely.
The one RDR question focussing on non advised selling notes, “Although the scope of the RDR includes non-advised sales, few suggestions for significant market or regulatory changes have yet emerged.”
Non advice is well nigh off the FSA radar and yet it does continual damage to consumer confidence in advice. Its entire proposition is that advice is not normally worth paying for. Furthermore this sector causes more consumer detriment than any adviser. Just look at PPI.
But the non advised sellers’ key failure is to sell only bits of what is needed as if they were all that is needed. That is how gaps are cemented in.
As a solution to this big issue, the RDR, though policymakers will deny any such conflict, in public at least, has us at a crossroads. It’s an either or chance.
We either grow the market following the Treasury’s financial inclusion agenda, drawing on the Thoreson review and at the same time the FSA responds to the laws of supply and demand and seeks to increase the supply of good advice to meet the needs of all those who become included. Or we seek to perfect advice in line with the FSA’s consumer protection agenda and continue on the current path of tightening up the quality, and thus shrinking the quantity, of the best group of advice suppliers overall - IFAs; thus creating the need to bring in a weird advisory underclass to add some numbers but not any quality.
The RDR is a push-me-pull-you trying to do both. And I can assure you that whenever that happens it is the negative agenda that wins. Compliance Directors veto Sales Directors not the other way round. Good advice will shrink and low quality selling will fill the vacuum.
There are 5 ‘streams within the RDR. One is a purely technical regulatory stream ensuring that any new set of rules does not conflict with others across history and Europe. Read its labyrinthine complexity and impenetrable jargon and see if you too think that it is regulatory red-tape that is (intellectually) “bust”.
Of the other 4 streams; The Financial Capability stream is the one designed to deliver Treasury objectives and is the only one aiming at the right targets. It has a step brother (for Otto is father to both) in the Generic Guidance review. These aim at closing gaps and encouraging demand.
But the other 3 streams are about sorting out the supply side and they have missed the big issue on that side by miles and seem aimed at reforming and marginalising the independent advisory sector that has always served consumers best, in favour of that which has served them worst.
The first of these streams, Incentivisation, seeks to end what is a compromise long proven in a million markets. That commission, though imperfect, is, in a healthy culture a generally fair and acceptable way of earning for giving advice. To end this compromise will, in the wider market, make independent advice appear far more complex and expensive than that offered by the agents of those who can pay their salesmen salaries and bonuses from the profits of product manufacturing. The lie that is ‘free advice’ will live again in the marketing of the banks and insurers and fund managers.
It is not commission that is evil, it is provider marketing practice offering encouragement to the unscrupulous. Both sides of that are easily stopped.
The next stream; Reputation and Professionalism sounds sensible, but does not tackle the key ruiners of both, instead it proposes an incredible maze of fine dividing lines between various types and duties. It is a bit Blairite in truth - there are previous rules that could do the job, but as there is no will to enforce them, it is easier to develop new rules and see if they somehow work. No one wants to do the hard work of enforcement; far easier to dream up new complexities for the law abiding.
Two previous rules, one now barely enforced at all by the FSA and the other long superceded by the blur of depolarisation, are where the RDR should focus if it wishes to restore faith and Sustainability (the other stream) in advisory distribution. Before I explain those rules, the ones that worked well enough, may I just explain some of the realities I see in the way RDR is headed so far?
Generic advice – a good intention – is meant to lead on to primary advice, a deregulated, more profitable version. It could be a sound concept to enhance the supply of advice, but it is a wolf in sheep’s clothing that will destroy the concept and value of “advice” once and for all in the consumers’ mind because it does not need to be suitable. It is primary selling, not advice.
Beyond Primary advice lie several other sorts. There is no point me defining them to you. Consumers will not listen or care anyway. Paul Lewis of the BBC gives an interesting talk in which he demonstrates that depolarisation – the last big general bit of regulation – changed the number of different types of adviser from 3 – independent or tied or non – to 4731. The RDR will increase even that insane situation geometrically.
Paul calls this process ‘complexification’ and thinks it is a key strategy of the banks. The logic is simple. If you complexify enough, consumers become so confused they are forced to fall back on big brands and can easily be taken advantage of.
The RDR, if implemented at all, will represent an incredible opportunity for the banks and possibly the main life insurers at the expense of those whose brand is independent advice. Why on earth would a regulator want to cause or even risk that tilt? The banks and direct selling life assurers have a track record, many, many times worse than IFA’s, of causing consumer detriment by selling what is best for them, not what is right for their customers.
The latest manifestation of this is the payment protection insurance sales boom that has seen some 10% plus of all UK clearing banks profits being made from the sale, normally without advice, of a very often useless insurance policy.
Rather than tackle the base causes of such rank abuse, the RDR continues to try to perfect advisory outcomes rather than pragmatically allowing the most consumer friendly distribution method to grow, while still tackling its many miscreants. Regulation must surely be pragmatic and proportional, not perfectionist and one-eyed.
I say one eyed, because in his speech Callum makes clear that there were two particular practices that got his goat. He linked bond charging and churning to the way advisers were paid. Look at it through the other eye and it is rather linked to the just recently discredited way insurers value themselves via their new business figures and to how they consequently treat with those who sell their products. There is no reason at all why the FSA’s enforcement team cannot spot and attack such a malpractice.
And again, Callum deduced that the oddly regular stopping and switching of pensions must be down to a hunger by sellers for initial commission. But a second eye would say that it has arisen because the charging structures of modern pensions in no way penalise the customer for early cessation. Indeed they are often sold on the basis of their innate flexibility of contribution. “Do this now and if you change jobs, stop, it doesn’t matter, there are no penalties, there are no excess ongoing charges, your fund will remain invested and you can transfer it without penalty into some other fund at your new job if that’s the best thing to do.” The charging structure works in the client’s favour. I’m sure there are exceptions but by and large the pain of pensions churning is borne by the insurance companies. That may be who drew it to Callum’s attention.
The right RDR answer is a lot easier than the wrong one. The RDR should seek to simplify, because that allows transparency. The emphasis should go back to the Move Towards More Principles Based Regulation. Test each RDR proposal against that sensible desire – its myriad of classifications and rules is exactly the opposite.
The RDR team should learn from Linnaeus, the great classifier and namer of things. He spotted in 1735, that you had to define the difference between plants and animals before you could move on to splitting fish from birds. In financial services the two ‘kingdoms’ are advice and selling. The RDR should go back to basics and focus on getting a clear gap in consumers’ and retailers’ minds between what is advice and what is just selling without regard to suitability.
In truth the FSA, having created the specific concept of advice, as being a process where responsibility for the suitability of any recommendation moves from the buyer to the seller, (caveat emptor becomes caveat vendor if you give advice) has utterly failed to promote or support that difference as being of value. It has left advice unvalued in the eyes of all but the wisest of consumers.
This was once the only borderline in retail FS regulation. Is it advised or, as it used to be known, execution only? The clearest evidence of how irrelevant that border has become – is in the title “Generic Advice” as chosen by the Treasury for the review it asked Otto to do.
In FSA terms that is a regulatory breach! To be clear, “advice” is specific, it’s when I say to you, “Mrs Smith you should do this.” If I say that and I’m wrong I pay before the ombudsman. When I say, “Mrs Smith a lot of people like you might think of this”, that is information. If it’s the wrong thing to do I do not pay. That’s why Otto clearly states in the first bold print he uses in his review; “the service can be more accurately described as providing information or guidance to people”.
The irony in the RDR is that it is the regulator’s failure to police that one line between advice and selling with information, and thus ensure that regulated advice is seen as being different and valuable, that is the cause of what Callum called ‘bust’. Advice has been brutally damaged by the regulator’s public parading of its every failure. While that may have been for the greater good; non advice, or information, has suffered no such damage and has flourished, not because it does good, but merely because the bad that it does has not concerned the FSA. Even in the PPI scandal, the fact that almost all of it was mis-sold without advice, meant that it was the OFT, rather than the FSA, that grasped the nettle. In another case the FSA seemingly allows firms to call their financial product sellers who do not advise, “advisers” because they are customer advisers, not financial ones!
If you can’t enforce 1 border, so that even people as well educated as Treasury ministers understand it’s logic, how can you enforce the dozens within the RDR?
All that is needed for advice to stop being ‘bust’ and to flourish in scale and quality is for the FSA to promote one key truth. “If you buy with advice you are far better off than if you buy without it.”
Such action would level a playing field currently hugely skewed against advice, and this should happen because the only way to close gaps is to ensure that those consumers who do decide to be responsible are encouraged to be properly so. Advised customers understand better, do more and keep it for longer than non advised customers. The inadequate solutions pedalled by non advising sellers cement in the gaps, they don’t reduce them at all.
That is the first of the 3 big lies that policymakers need to address. Simply force those who can sell without concern for suitability to be transparent about their limitations and lack of responsibility they take for the thing sold.
The next two are outside the scope of the RDR, but integral to the failures it seeks to address. The Government needs to explain, if these gaps are to be properly closed, the fact that the old age pension, invalidity benefits, widow’s benefits and all the rest are simply not adequate to maintain any form of conventionally desirable lifestyle. The welfare state is no state to be in. The Government does not let people know that, so they exist in a false confidence that they will be looked after – the Government needs to stop that lie.
The third lie is that one can legitimately give good advice to the poor with relative simplicity. One can’t. It is more complicated to advise someone who earns say £15k a year than it is to advise someone who earns £115k a year. The latter’s needs are defined by them, and the solutions by me and my understanding of the market. The former, the poor man’s needs, are defined almost entirely by state credits and means tested benefits that render advice to save very often wrong. Calculating what is right is immensely complex and thus far too expensive to deliver to the people so trapped. Before the financially excluded can be included, the means testing world of tax and pension credits that renders advising the poor an impossibility if one is to treat customers fairly needs reform. Recall Mr Frank Field!
So if I may summarise:
• I would beg for regulatory humility. What hasn’t worked? Depolarisation. Does RDR fix that failure? No it complexifies it.
• Focus on closing the gaps with generic guidance leading to properly advised solutions rather than trying to perfect and thus marginalise what is already the best way to buy, and introduce new bad ways of buying.
• Do this by allowing advice to fairly flourish by telling the truth, that advised customers are better off than ones merely sold to, if only thanks to the ombudsman’s greater protection, but in truth for many more reasons. Advice will then grow in strength, quality and reputation.
• Maintain a strong and flourishing independent advice sector, it is the surest guarantor of rigorous analysis and quality control.
• Don’t try to dictate how people should pay for anything. Don’t focus more effort on the generally law abiding. Move on Towards More Principles Based Regulation.
• Instead search out malpractice and kill it off.
• Above all, accept that the consumer has no taste for the complexities of the system of names and rules the RDR envisages, so stop listening to the complexifiers and start simplifying.
Thank you.
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