Brokers: will the FCA be coming for your commissions?

I'm going to take you back to 2008, to Gleneagles, when the famous speech was made that turned the regulation of financial advice upside down. 

Initially this was greeted with positivity: enhanced professionalism, greater consumer protection, a question of improving trust and boosting the reputation of financial advisers, so the likes of Mark Hoban wouldn't make wry comments in the House of Commons about Maccy D qualifications.

But by 2010, consultation after consultation and hundreds of responses and committee sessions revealed there was a huge disconnect between what the then Financial Services Authority was trying to do for investment and pensions, and what might happen to the world of insurance. 

This will leave people with no safety net, no protection at all in the likelihood that something will happen to them.

Financial Adviser's big pink pages were covered with stories of insurance brokers and providers alike warning of the immense consequences of imposing a widespread commission ban on all advised financial services products.

Deputations from the protection profession spent hours inside meetings in the old FSA offices in Canary Wharf, explaining concepts such as "protection is sold, not bought", and the importance of allowing commission payments to continue on insurance products. 

One argument - that it is hard enough to provide vital cover for people with a monthly premium, let alone suddenly switching to upfront and/or annual fees - among others carried the day and the commission ban only applied to those rare insurance products that were backed by investment. 

Another argument was that a significant number of financial advisers are recruited and trained up via the mortgage and protection route, necessitating a means of providing income to much-needed newcomers who are learning on the job.

In the end - as we reported at the time in 2013, insurance commission was excluded from the outright ban, and provisions were even made for those mutual societies who sold Holloway income protection products, so they did not have to adhere to the Retail Distribution Review’s criteria.

This meant that advisers could still receive commission and did not have to hold level four qualifications. 

Well, most advisers now are at least level four or higher as part of an overall push for professionalism - and the commissions remain. 

Direction of travel

But will they continue to do so?

In its latest missive, the regulator has outlined its consumer duty priorities for the life insurance market over the next two years after finding "significant failings".

According to its Insurance market priorities 2023-2025, the FCA stated that, when looking at specific areas of the industry, it found “significant failings”.

In it, the FCA stated: "For the life protection market, through our thematic review of Prod 4 rules, we are testing whether protection products are delivering fair value to customers. We continue to engage with insurers to identify where there may be evidence of poor outcomes.

"We are also concerned that levels of commission may not always be consistent with fair value and may incentivise unnecessary product churn."

It's a small comment, a short comment, an almost throw-away comment. 

But to someone with a long memory, it has sounded a tinny alarm bell ringing in my head.

I know, I bang on about this a lot - whether there is a move towards the FCA becoming a price regulator and whether the FCA will want to start putting pressure on commissions. 

The regulator has seemingly conflated 'cost' with 'fair value'.

"Churn" was indeed a big concern on investment products and one of the reasons why the then FSA pushed for the removal of commission on investment products. 

If they're using this language about insurance products without evidence that product churn has indeed been happening, then you can see the direction of travel. 

As one commentator said to me, 'switching' is not the problem that the regulator might think it is. Insurance providers and brokers will often switch customers to newer, cheaper products with lower premiums.

Rarely are people put on more expensive premiums, unless there is a significant health or life development that means more extensive underwriting rather than a quick decision.

Moreover, brokers can waive commissions already or just have outright fee structures - but even so, the average monthly life insurance premium in the UK is around £38pm.

A tiny basis point of that monthly premium will be the commission - if commission has been applied. 

Disaster zone

Don't get me wrong: a review of commission and products and suitability is always welcome and probably long overdue in the insurance world.

But if there is an outright ban on commission, I would not be surprised and probably neither would you.

It may be a long time coming but under the guise of consumer duty, but I'd bet my left eye the regulator will eventually squeeze out commission payments on insurance.

And this would be a disaster.

We already know that people have been ditching their insurance as the cost of living crisis bites.

It doesn't take a brain child to work out that if commissions are stripped out of the product because "levels may not always be not consistent with fair value", and added together as a hefty upfront or even annual fee, there will be many people who just use that as an excuse to pull the plug on their premiums. 

Many won't even check to see if the upfront fee and/or annual fee is fair value, or work with their broker/insurer to shop around or negotiate a lower price. Some will just think the whole thing is unaffordable.

Moreover, for those with more complex insurance needs, the upfront costs that involve chasing GP reports, complex underwriting and longer conversations could be completely offputting for someone whose family may end up desperately needing the financial support that insurance can provide.

Again, the regulator has seemingly conflated 'cost' with 'fair value', forgetting that if people are expected to pay £600 or so upfront for a £30pcm average premium, they just won't do it.

And this will leave people with no safety net, no protection at all in the likelihood that something will happen to them.

Don't get me wrong: consumer duty needs to be applied in the spirit, not just the letter of the law. The FCA is right to highlight failures.

But before the regulator gets any further down this road, please can brokers and providers look to see where they can self-regulate better; reviewing all products, pricing and recommendations and working together to make sure there is no reason for the regulator to remove commission on insurance products.