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Last Updated: Tuesday, 17 May, 2005, 08:13 GMT 09:13 UK
Concern over financial commission

By Paul Lewis and Jennifer Clarke
BBC Radio 4's Money Box Investigates

A man getting advice
There is evidence that raising commission does increase sales

There are widespread concerns within the financial services industry that commission paid on financial products can bias the sales process, the BBC has discovered.

Dan Waters, Head of Retail Markets at the Financial Services Authority, told BBC Radio 4's Money Box Investigates:

"We recognise the conflicts of interest that arise in a commission type of structure. There is an incentive misalignment risk there, there's no question about that."

His concerns were backed up by a senior executive with the Association of British Insurers (ABI), the trade body for much of the investment industry.

ABI Head of Regulation Francis McGee said it had found a situation that "a responsible industry could not overlook".

"There is sufficient cause for concern that requires that the commission system is improved," he added.

Different picture

Earlier this year, the ABI published a major piece of research which looked at how financial advisers are paid, and whether the reliance on commission - which still accounts for most of their income - led to biased sales.

The research, which was carried out by CRA International, formerly Charles River Associates, is cited by the industry to prove there is no widespread commission bias.

Roughly one in five people were not recommended an ISA where they should have been
Kyla Malcolm, CRA International
But when Money Box Investigates spoke to Kyla Malcolm, who carried out the research, a different picture emerged.

She told the programme:

"There was evidence of some bias both from a bias to recommend a particular type of product and also bias to recommend particular providers depending on the commission.

"On the product side we found that roughly one in five people were not recommended an ISA where they should have been, and were instead recommended some kind of bond product."

She said an independent judging panel had assessed that the ISA - a simple tax-free investment - was the right product, not the more complex bond. But the bond paid more commission.

Despite concluding that the bias was not "prevalent" or "systemic", the findings also confirmed that raising the commission paid on a particular product would increase sales.

"There's some evidence on single premium investments, so where you're investing one lump sum, that the change in commission will lead to a change in sales," Ms Malcolm said.

Sales adjuster

The research found that a 0.5% rise in commission - from 5% to 5.5% - could lead to an increase in market share of 14 percentage points, from 20% to 34%.

Peter Hales, Norwich Union
I don't think there is any evidence it does bias sales
Peter Hales, Norwich Union
And Britain's biggest life insurance, pensions and investments provider, Norwich Union, confirmed it uses commission rates to adjust its share of the market.

Sales and Marketing Director Peter Hales told the programme:

"We operate our commission as a fine-tuning mechanism... to maintain our position in the market place. We adjust our commission all the time."

And he agreed that Norwich Union had cut the commission on unprofitable stakeholder pensions to discourage IFAs from selling them.

"We cut our stakeholder commission by two thirds. Sales have been down considerably," he said.

Mis-selling scandals

Nevertheless, Mr Hales insisted commission does not bias sales:

"I don't think there is any evidence that it does bias sales. Commission is not some evil devious mechanism to actually create a mis-sale," he said.

We must be tough on mis-selling and tough on the causes of mis-selling
Mick McAteer, Which?

Consumer groups disagree. Mick McAteer, Principal Policy Officer at Which? told the programme:

"I really do think that all the mis-selling scandals like pension mis-selling and mortgage endowments can be traced back to the reliance on commission," he said.

He warned that without action, trust in financial services would remain low, and said:

"We must be tough on mis-selling and tough on the causes of mis-selling.

"I can't overstate the need to restore confidence in the UK's financial services industry given the pensions crisis we face."

BBC Radio 4's Money Box Investigates The Sins of Commission was broadcast on Tuesday, 17 May, 2005, at 2002 BST.

The programme was repeated on Sunday, 22 May at 1702 BST.



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SEE ALSO:
The sins of commission
10 May 05 |  Moneybox
Finding fair financial advice
04 Jan 05 |  Business


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