Commission bark was always worse than its bite

Well, whether you wanted such a debate or not, we may have got one now. Axa UK group chief executive Paul Evans, speaking at a recent Association of British Insurers conference, has just about blamed it for almost everything.

He said: “We will be pushed aside if we do not rapidly re-earn the trust lost over past decades – decades during which the business model was different because of adviser commission, the legacy of which is an open sore that continues to undermine trust in what is now a completely different proposition.

“That our sector has lower consumer trust than the banks, with all their troubles, is embarrassing. That we are trusted less than estate agents is frankly humiliating.”

Can’t say plainer than that, but one wonders what advisers think?

An obvious example where commission was not to blame was the failure of insurers to clean up their acts over the open-market option

They might note that ‘adviser commission’ was also insurer commission and fund manager commission.

In terms of who was receiving commission, it was sometimes tied insurance sales forces. As various fines reveal, bank sales forces got their share of the commission cake, although the banks themselves received a considerable chunk of the remuneration too.

Things clearly went badly wrong from time to time, but was it always commission that was to blame?

Split capital investment trusts did not fail for reasons of commission. Endowments can be condemned as commission-driven, but one might also argue their problems were down to a general failure to understand how the economic and stockmarket context had changed since the product’s 1980s heyday.

And was it necessarily commission that left many hundreds of thousands without repayment vehicles or was it ultimately the wrong regulatory reaction?

As for pension mis-selling, I would apportion blame first to the ‘chain-breaking’ government, then insurers’ management and then, and only then, to advisers of different types.

Several insurers nearly managed to run themselves on to the rocks financially in the late 1990s and early 2000s and no doubt commission contributed, but many were guilty of near-reckless strategic asset allocation in their life funds, which was compounded by a race to pay the highest terminal bonuses.

Keydata, above all else, was a relatively easy sale, although Arch Cru’s offer of above-market-rate trail must shoulder some of the blame for the ‘sales success’ of the firm.

More generally, there were some pretty poor outcomes that can be blamed squarely on commission. Business tended to jump around when the clawback period ended at around, I believe, week 56 of a contract. Ned Cazalet’s 2006 report ‘Polly put the Kettle On’ was correct about how much value this destroyed.

But another very obvious example where commission was not to blame was the extraordinary failure among many insurers to clean up their acts over the open-market option.

So should we scrap the RDR? Well no. But was it all about commission? No. And the sooner the industry understands the RDR wasn’t all about commission, the closer it will get to understanding what really went wrong.

John Lappin blogs about industry issues at www.themoneydebate.co.uk