MONEY BOX INVESTIGATES THE SINS OF COMMISSION Presenter: Paul Lewis Producer: Jennifer Clarke Tx: Tuesday 17th May 2005 Rpt Tx: Sunday 22nd May 2005 ******************************** LEWIS: Commission is at the heart of the financial services industry. Nowadays, when we want to invest or borrow, save or insure we go to a financial adviser. But most of them don’t earn money by advising us. They get commission on what they sell. We want advice. They need a sale. The industry says commission is just the way advisors are paid HALES: Commission pays for advice. It is not some evil devious mechanism LEWIS: But critics say commission is expensive MODRAY: Over 30 years for example it could add up to as much as say £67, 68,000. LEWIS: Commission is incomprehensible CARDY: There are some mechanisms that I, after years in the industry, sometimes find difficult to understand LEWIS: And commission is bad for customers MCATEER I really do think all the mis-selling scandals like pension mis-selling and mortgage endowments can be traced back to commission. LEWIS: So is the industry ready to deal with the Sins of Commission? TRAFFIC NOISE: LEWIS: I’ve come to Sandbach in Cheshire to find out how one man resolves the daily conflict of interest between what his clients want to buy and what he has to sell them. PHONE RINGS ELLWOOD: Hello Mark Ellwood speaking. Is that mortgage or remortgage? Okay let me get a little bit of information., LEWIS: Mark Ellwood sells mortgages. Although he sometimes charges a small fee towards the cost of his time, the vast majority of his income comes from commission. So he needs to sell products to earn his living. And in this part of England he can’t survive on the commission he gets on home loans, which are typically well under £100,000. His clients come for a mortgage. But he wants to sell them insurance. ELLWOOD: If I did mortgages alone, I’d find it very difficult to make a living. Life insurance and general insurance are essential to actually make living at all. LEWIS: How much do you make, what is the commission you get on a mortgage? ELLWOOD: The market average would appear to be about 0.35%, £350 per £100,000 of the mortgage. LEWIS: And what sort of commission can you earn on insurance products? ELLWOOD: If you did £100,000 mortgage and you sold life insurance, critical illness, the full range of things focused on that mortgage alone, you could probably look at commissions comfortably getting up round about £2,000. It’s not always that high, I wish it was, I’d have a much better standard of living if it was. But I aim for a thousand, that’s what I’d like to get. LEWIS: So a mortgage is almost a loss leader to get this other business? ELLWOOD: In that respect, I suppose it is yes. LEWIS: Mark says he has to offer insurance – if he didn’t and the client died or fell ill he could be accused of not treating his customers fairly. He says he only sells insurance when appropriate, but he has seen the evidence from his own clients that other advisors are not so scrupulous and find ways to rack up the commission. ELLWOOD: I’ve actually seen clients where they’ve had less than a £100,000 mortgage and I’m fairly sure the broker who sorted them out has probably walked away with an excess of £4,000. LEWIS: This is the first danger with commission – being sold products we don’t need because the advisor earns commission selling them to us. Mark sells mortgages and insurance. What about people who sell investments? How does commission work for them? LEWIS: Hi I’m Paul Lewis from the BBC MODRAY: Hi Justin Modray from Bestinvest. Do you want to come through to the office where it all happens LEWIS: Justin Modray is an independent financial adviser – an IFA. And his firm Bestinvest has been very critical of commission and the role it plays in financial sales. Justin explained to me the basics of how commission works. MODRAY: In simple terms there are two types of commission. There’s initial commission which is a commission paid up front and what’s called trail or renewal commission and that’s commission based on the value of investment year after year. Initial obviously is by far higher the commission normally, typically anywhere between 3 and 7% depending on the product and trail’s typically about ¼ to ½%. LEWIS: So the initial commission is what you get for selling the product and the trail commission is for what? MODRAY: Well in theory the trail commissions to look after the investor. Now unfortunately that hasn’t always been the case. LEWIS: So an adviser can earn an amount upfront when the sale is made and then a percentage of our money every single year from then on, the trail commission. Half a percent may not sound much, but over the years, as we’ll see, it adds up. And although it will be more if the investment does well, it’s paid even if it does very badly. Simon is one of many Money Box listeners concerned about the way charges drain their investments. SIMON: Commission was something I’d never really thought about prior to the stockmarket problems, when all of the sudden I was acutely aware the only person making any money out of my investments was my financial advisor and that I was continuing to pay possibly quite a large sum of money in commission on investments that for me were going markedly rapidly down hill and I guess I got a little bit irritated about it LEWIS: Trail commission is paid regardless of performance and whether any continuing advice is given or not as long as we keep the investment. Initial commission is paid upfront, as soon as the product is sold. And different products bring the advisor very different rewards. Is there a danger that we’ll be sold one product rather than another just because the adviser earns more? Mortgage broker Mark Ellwood admits the temptation. ELLWOOD: To be absolutely honest, if you’ve got two identical products and I mean absolutely identical, they fit the client profile, then yes, you are only human, you are going to take whichever one pays you more. But it does not normally sway the decision. You certainly wouldn’t take a more expensive one over a less expensive one if the less expensive one will do the job. LEWIS: But what if it doesn’t do the job? With a mortgage or insurance that’s fairly easy to see. It’s much harder with an investment. I asked IFA Justin Modray to compare the commission an advisor would get from someone investing £100, every month, in two products both invested in shares. The first, called a unit trust, is a simple stock market investment. MODRAY: The initial commission on a unit trust is typically 3% - every time you invest £100 it’s £3 taken off each time. So after ten years you would have paid about £500 worth of initial commission on the unit trust. LEWIS: So the advisor earns £500 over ten years from a unit trust. But what about the same amount invested in another product that does a similar job, but is more complex - an endowment, which millions of people bought in the 80s and 90s? MODRAY: If you put £100 in over a year – that’s £1200, up to 80% - £960 – might be taken out as commission. So that’s a big chunk vanishing more or less straight away in the first year LEWIS: So you’re saying with an endowment, everything I pay for the first year, just about, will disappear in commission to the sales person MODRAY: Quite often yes. LEWIS: So with an endowment the advisor gets £960 upfront, compared with £500 spread over ten years for the unit trust. The difference is clear. And so is the temptation to sell us the more expensive endowment. And that’s the second way commission can cost us – being sold one product just because it pays more commission. And many of us don’t realise we pay every penny of that commission by a deduction from the money we invest. Over the life of the investment that cost grows dramatically. £960 off our investment in year one means we have less and less to grow every year after that. MODRAY: So after 5 years for example the difference might be about £1200 or £1300 ie you’re £1200 or £1300 worse off because commission’s been taken out. Moving forward to say 25 years that figure’s grown to over £4000. LEWIS: So the person who sold it you isn’t getting more money each year in this example, it’s just the effect of having that £960 taken out right at the start MODRAY: It is, it’s what known as opportunity cost, it’s the lost opportunity for not having that money in the funds from the word go. LEWIS: So £960 off our money turns into a loss of £4000 if we keep the investment 25 years. And Justin had an even more remarkable example in his spreadsheet. Suppose you are a big investor. And each year you put the maximum allowed into an individual savings account – an ISA – invested in shares. That’s £7000 a year and you do this every year for 30 years. What is the long term effect of the commission hit? Justin took me through the arithmetic – stick with it, even I was shocked. MODRAY: Every time you put in £7000, if you pay initial commission that’s 3% knocked off so that’s £210. On top of that the actual fund value each year – and that obviously increases with every £7000 going in and plus investment performance – about ½ % is taken off as a trail commission LEWIS: How much would that add up to over time? MODRAY: A lot. Over 30 years for example it could add up to as much as say £67, 68,000. LEWIS: Just from losing £210 a year and then ½ % which sounds very little – you’re losing nearly £68,000? MODRAY: You’re right. It’s basically down to compounding – the bigger the fund gets the higher the trail commission. The ISA fund would be worth almost half a million pounds at the end of 30 years, the trail commission on that at ½% is £2500. LEWIS: So this is the third way that commission can damage our wealth – an afternoon’s work for an advisor can cost us tens of thousands of pounds. Believe it or not, these examples are the easy ones – trail commission, initial commission. The industry estimates there are not two but 1200 different ways commission can be paid. Gill Cardy is an independent financial adviser – an IFA – who doesn’t take commission at all. Everyone in her firm, Professional Partnerships, charges a fee for the work they do. She says the various commission structures are beyond even her. CARDY: The commission mechanisms are complex. There are some mechanisms that I, after years in the industry, sometimes find difficult to understand and it’s not always logical. It’s not sensible, it’s not always rational. LEWIS: And because advisors can choose which bits of commission to take and how much, we can end up paying different amounts of commission on the same product from different advisors. All this complexity makes it easier to hide bad advice. To disguise that conflict of interest between what we really need and what the adviser wants to sell us. McATEER: The sellers of products face a choice, you know, do they actually recommend the product that suits the consumer’s interest or do they recommend the product that actually pays them the highest level of commission? LEWIS: Mick McAteer, Principal Policy Officer of the consumer organisation Which?. He doesn’t mince his words. McATEER I really do think all the mis-selling scandals like pension mis-selling and mortgage endowments and products with massive front-end loaded charges and rip-off products can be traced back to the reliance on commission and the kind of business models that reward staff according to how much they sell rather than the quality of the sale. I think much of the detriment in the UK financial services industry can be traced back to commission. LEWIS: Of course, it’s not just independent financial advisers who face this conflict of interest. Historically, most mis-selling has been done by agents who work for – or are “tied” to – one insurance company or bank. And in fact most people go to their bank, not an IFA, for financial advice. That limits the choice of product they can be sold. But it doesn’t limit the effect of commission. NEWS BULLETIN: The Financial Services Authority has fined the Lloyds TSB bank nearly £2m and ordered it to pay £98m compensation for failing to give adequate warnings of the risks of its extra income and growth plan…. LEWIS: In September 2003 Lloyds TSB was fined for mis-selling investment bonds through its branches. The regulator’s judgement was clear – they had been mis-sold because of the pressure on staff to earn commission. And there was further evidence last week from internal Lloyds TSB documents seen by Money Box that the same pressure was responsible recently for many customers being sold loans they could not afford to repay as well as expensive and often useless insurance products. LEWIS: Lloyds is not the only bank which gives incentives to staff to sell products. Its high street rival HSBC is facing a strike over a new bonus scheme it has introduced for counter staff. Many of them earn less than £13,000 a year and rely on the bonus to top it up. This year the way they earn that bonus changed. The only guaranteed way is through sales of the products the bank wants to promote. Staff have voted to walk out on Friday 27th and demonstrate at the bank’s Annual Meeting. Cathy Tinston, Amicus/Unifi’s National Officer at HSBC, told me why. TINSTON: The value of your bonus will be determined solely by the sales that you make to customers and the cross sales that you make to customers because the sales will give you so much per point. Each point is worth 8p to the individual. So they can actually see every time they do a sale how much that’s going to mean in their bonus. LEWIS: What do people earn from selling particular products? TINSTON: Well not every product has a point value, so that in itself can lead to behaviours which are not really acceptable. If a customer comes in and says that they’re having a bit of a tough time at the moment and they just need an overdraft to tide them over to the next salary or perhaps for a couple of months, there are no points to be gained from an authorised overdraft. There are points to be gained from a personal loan. So if you were really chasing your points you might find that the temptation to try and sell that customer a customer loan when really it’s not what the customer wants, but you will get points for selling a personal loan, and the points double and triple with some products if you can sell protection with it LEWIS: You mean insurance, payment protection insurance? TINSTON: Indeed. So again there’s pressure on behaviours which may not be in the best interests of the customer. LEWIS: So one kind of lending earns points, another doesn’t. And if you sell insurance as well, your points can be doubled or even trebled. And what do points mean? Bonuses! I put Cathy Tinston’s criticisms to Sue Jex. She’s Head of Employee Relations at HSBC and confirmed that different products do carry different rewards. JEX: If you agree to an overdraft there are no points attached to that at all - a personal loan does have points. LEWIS: Why do you distinguish between an overdraft and a personal loan because an overdraft may well be cheaper and more appropriate mayn’t it? JEX: It may well be in some circumstances and hopefully that would then meet the customer needs LEWIS: I don’t understand why there isn’t the same bonus for an overdraft as there is for a personal loan because that just sets up this conflict between the employee whose objective will be to sell a loan because they earn points and the customer who may well be much more suited to an overdraft JEX: If a customer is more suited to an overdraft that’s what they will be given. Staff can lose all of the sales based bonus they’ve achieved if they don’t sell products in the right way. Every quarter we are looking at service quality measures including complaints and usage of products for an individual and we can actually reduce their bonuses LEWIS: But isn’t the whole point of that that the incentive on the employee is to sell and you have to control it? JEX: The employees we’re talking about – they’re paid very good market salary LEWIS: How much are they paid? JEX: The average clerical salary is over £15,000, the average clerical cashier salary is £13,000 LEWIS: Well below the national average wage – I understand a typical bonus has been around £2000 JEX: That’s right LEWIS: That’s right – about what 14% it’s a lot of extra to earn JEX: We hope it’s a good incentive to help us grow the business and we’re confident in their abilities to do it. LEWIS: A 14 per cent boost to your pay clearly does give an incentive to sell, and the bank uses that to encourage sales of the products it wants to shift. Sue Jex believes management is strong enough to prevent the wrong product being sold. And many independent financial advisers have told me that the controls on them by the Financial Services Authority – the FSA – mean they have to Know their Client and Treat them Fairly. They say the rules are so tough it would be almost impossible for them to mis-sell– at least on the scale that happened in the past. Paul Banfield is a partner in a small independent financial adviser in Sutton, Surrey called Best Advice. BANFIELD: I think that we’re the most regulated industry in the country and the regulations now in place should ensure that the correct advice process is always maintained. The Know your Client rule is really very important so in order to understand your needs and make sure I offer the best advice I need to go through with you your personal circumstances as well as your objectives for the future and any risk profile that you may have. And therefore once I know your financial circumstances correctly there should be no misadvice given because of course I have a full understanding of what you need LEWIS: And many IFAs feel the same. The regulator is always watching, policing what they do. So many were surprised when the Association of British Insurers – the ABI – that’s the trade body for most of the investment industry, commissioned research into how advisors are paid and whether their sales were biased by the commission that was paid. The study was done by Charles River Associates and the results, published in February, are now widely quoted by people in the business as showing there is no bias, or at least not enough to worry about. David Severn is the Director General of the Association of Independent Financial Advisers. When I asked him whether commission levels did bias sales, those ABI results were his first defence. SEVERN: I think the good thing about the ABI’s research is it demonstrates that’s not the case. I think IFAs try to put the interests of their customers first. I think it would be surprising in an industry which generates several billion pounds worth of revenue if there wasn’t the occasional instance of biased advice. But it was not found to be on any systemic level LEWIS: But do you accept that higher commission does drive higher sales of those products? SEVERN: I think commission or bonuses attached to salary, all things have some incentive effect on advisers whether they’re independent or whether they’re working for a bank. LEWIS: But you’re drawing a distinction between incentive and bias? SEVERN: I think I am because again if you come back to the research results, the really comforting thing from them is that they show that consumers are not ending up with a product which they should not have. LEWIS: And Britain’s biggest provider of life insurance, investments and pensions, Norwich Union also believes the Charles River results exonerate the industry. Sales and Marketing Director Peter Hales HALES: I believe the research undertaken by the ABI through Charles Rivers actually indicated there was no evidence of bias to sell that was driven by commission. In fact, the same results were achieved whether the customer paid by fees or by commission. LEWIS: So your view clearly is commission doesn’t bias sales? HALES: I don’t think there’s any evidence that it does bias sales and I think the FSA came to that view originally some years ago. LEWIS: But in fact the research is not quite as comforting as David Severn and Peter Hales believe. Kyla Malcolm, of Charles River, did that very research they call in evidence – both recently and three years ago. On each occasion she found that commission did influence sales. MALCOLM: 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. But we didn’t find that this bias was prevalent, it wasn’t absolutely everywhere. LEWIS: But to what degree was it found? MALCOLM: 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. LEWIS: Was that because they got more for selling the bond? MALCOLM: Well bond products do get more commission. There wasn’t any other reason that they should have been recommended the bond and it was agreed by a panel of IFAs that the ISA recommendation would have been the right recommendation. LEWIS: So the research paid for by the investment industry actually found that one in five commission based IFAs did recommend the wrong product, a product which paid higher commission. Despite these findings the report concluded that there was ‘no evidence of a systemic problem of bias’. And it found that some fee-based advisers also sold the wrong products. But there is a puzzle in Kyla Malcolm’s research. Despite not finding what it called ‘systemic’ bias, the results clearly show that raising commission does increase a product’s market share. MALCOLM: 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. LEWIS: Without a change in the product, it’s just simply that they earn more? MALCOLM: That’s right. LEWIS: The detailed figures in her report show that by raising commission just half a percentage point, a company could increase its market share by 14 percentage points. So to that extent commission does influence sales. Commission rates can be used this way because they are not regulated. Until 1989 levels of commission were controlled, set down by the regulator, then called LAUTRO. But the Office of Fair Trading decided this Maximum Commission Agreement worked against competition and the interests of consumers. So it scrapped it, with surprising results. John Chapman is now a respected commentator on financial services. Back then he was a senior civil servant who observed the change. CHAPMAN: They had a formula at that time called the LAUTRO formula, which meant that salesmen got commission of 25% of the first 27 months premiums paid by the client, and why they had this maximum commissions agreement was because people in the industry realised that if they didn’t, they would all be competing by offering salesmen higher commissions. As it proved, when the Office of Fair Trading decided the agreement was anti- competitive. I think the Office of Fair Trading then expected competition to drive commissions down. In fact the opposite happened and the providers, the big companies bid for the attention of the IFAs by putting up commission and overnight the bills for consumers via charges in endowments and pension policies rose by, a broad guess, of the order of £500 million. LEWIS: John Chapman says the commission free-for-all, far from empowering consumers, simply allowed insurance companies to buy – or cut – their market share by raising or lowering the commission they paid. CHAPMAN: You’ve only got to browse through what they call the pink papers, Financial Adviser, and Money Marketing to actually see that such and such a company has launched a new product with enhanced commission. I mean that is how you sell a product. What has happened with the Norwich Union, Scottish Life, Standard Life, moving away from selling stakeholders. They are raising the commissions on the higher charge personal pensions and lowering them on the stakeholders with a clear message to the IFAs that they’d like them to sell the new personal pensions. I think wishful thinking to say, no there’s no bias. Of course there is bias because this is actually how the providers operate. LEWIS: The stakeholder pensions that John Chapman mentioned were introduced by the Government in 2001 with an upper limit on total charges of 1% a year. The industry said this was not enough to make a profit and pay commission. So it slashed the commission paid to IFAs – sales have been very low. And here is the contradiction in all of this. Insurers and banks, sales staff and financial advisers, tell us that commission does not bias sales decisions. And yet when the banks want to increase sales to customers or insurers want to change their market share, they raise or lower the commission paid. One of the companies John Chapman mentioned is Norwich Union. Its Sales and Marketing Director, Peter Hales, is the man who earlier told me very clearly there was HALES: No evidence of bias to sell that was driven by commission. LEWIS: So I was curious to ask him why Norwich Union had cut the commission paid on stakeholder products. Was it to manipulate market share? HALES: I think if a company doesn’t wish to take any business in a particular area of the market, it could cut its commission considerably. We cut our stakeholder pension commission by two-thirds because clearly we didn’t believe the margin could carry the level of commission that was being offered elsewhere in the market. LEWIS: What happened to sales? HALES: Sales have gone down considerably, but I wouldn’t necessarily blame IFAs for that. LEWIS: But help me out here, help me to understand this. You told me at the start commission didn’t bias sales. You are now telling me that if you cut your commission it’s perfectly reasonable for an IFA not to sell your products. How is that not biasing sales? HALES: The amount an adviser earns from the sale will affect the sale and whether that is by commission or by fees. You have to see commission in the light of the cost of advice. LEWIS: Have you ever raised your commission to increase your market share? HALES: I’m trying to remember particular instances. We adjust our commission all the time to make sure that we are within the market. But it’s just one aspect of a wide range of factors that contribute to volumes of business. LEWIS: Sure, but it’s like a fine tuning mechanism, you raise or lower it just to keep yourself in the market. HALES: That’s the way we operate our commission, as a fine tuning mechanism LEWIS: To keep your sales at the level you want. HALES: To maintain our position in the market place. LEWIS: So Peter Hales says commission can be used to fine tune sales, or to cut them where a product isn’t profitable. But somehow that’s done without biasing the decisions made by person doing the selling. He believes people don’t understand that commission is simply a way of paying financial advisors. HALES: Commission pays for advice and commission funds distribution. If you don’t have advice and you don’t have distribution, you don’t have sales. Products, whether they’re insurance products, investment trusts or boxes of cereal, only actually get to market because there’s a margin for distribution and a funding of the cost of retailing those products. That’s what commission is, it is not some evil devious mechanism to actually create a mis-sale. It is about reaching the customer. LEWIS: Despite these views from this major financial services company, the body that represents it, the Association of British Insurers – the ABI – and the body that regulates it, The Financial Services Authority, both say change is needed. First the ABI. Francis McGee, its Head of Regulation and Strategy has the job of following up the Charles River research we heard about earlier. He recognises that commission does create a problem. MCGEE: What we found is a situation that a responsible industry can’t overlook. Just as I don’t think the critics can go on asserting that bias is rife, that the advice model is completely untrustworthy. I don’t think the defenders of commission can carry on asserting that everything’s rosy in the garden. My view is that there’s sufficient cause for concern around complexity, around transparency and around the need to demonstrate that the customer is getting the service that they are paying for, that requires that the commission system is improved and I don’t think that these issues can stay in the too- difficult basket. LEWIS: So the body that represents insurers is worried. And so is the regulator, the Financial Services Authority. Dan Waters, its Head of Retail Markets, told me he sees the contradiction between commission and customer service. WATERS: 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, and that’s why the things that we’ve done around commission, and around trying to strengthen the competitiveness of the market are forces on the other side to work against that kind of incentive. LEWIS: So the regulation that the Financial Services Authority does is in a way a counterweight to the conflict of interest that exists between an adviser and their client. WATERS: That’s a very good way of thinking about it. LEWIS: A growing number of IFAs agree. Their answer is simple. If commission biases sales – or is even believed to – then simply stop taking it. Charge a fee like lawyers and accountants. It’s a model more and more are adopting, including Gill Cardy of Professional Partnerships. CARDY: To me there is an attractiveness in the idea of saying, that actually we should get rid of commission altogether, because I think it gets rid of a lot of the uncertainty, it gets rid of a lot of the complication as far as IFAs and clients are concerned. LEWIS: It seems a good solution. The advisor’s pay doesn’t depend on making a sale. And the customer knows the cost upfront and pays it. But there is a problem. Gill Cardy charges £150 an hour. It may sound a lot but it’s hard to get good financial advice for much less. Many charge much more. A typical pension assessment might take five hours, work it out, £750, it’s a lot of money. Especially because, if we pay it through commission, it seems free. Many smaller financial advisors do see the attraction of fees but think they just won’t work. Paul Banfield from Best Advice. BANFIELD: We started offering fees a while back and we found that clients actually are very very cautious and don’t wish to pay a fee from their own earnings from their own pocket. LEWIS: What sort of take up of fees have you had? BANFIELD: Practically nil. We deal with people in Surrey from many walks of life and your builders and your plumbers and your carpenters on the whole will just not accept fees and of course these are the people that need the advice the most. They’re normally not very financially savvy. Therefore where we’re trying to get people to save more and invest for their future and take out pensions it’s really that market group that would be hit the hardest. If they don’t come to us they will not take advice and they will not have the correct investments for their needs. LEWIS: Research backs up these grassroots concerns. People are very reluctant to pay for financial advice directly. That’s why, three years ago, the Financial Services Authority abandoned proposals to make all independent advisors work only for fees. Dan Waters explains. WATERS: There are advisers who are able to make their living on a fee basis alone but we know from knowing where consumers are at the moment, that that is not a model that’s going to work across the board. There are many consumers who don’t understand their own financial needs, who do not confidently approach the market. If they’re told that in order to begin the dialogue they’ve got to pay £200 up front, it’s highly unlikely that they’re going to come to the table. LEWIS: Instead the FSA has launched a major change in the way financial products are sold. From the end of the month all Independent Financial Advisers will have to offer customers the choice of paying a fee or paying through commission. And a new document, called the menu, will show the amount of commission the adviser will earn on standard products, and compare it with the national average. Dan Waters showed me the menu which he hopes will give power back to customers and let them negotiate on price. WATERS: For collective investments, for example, unit trusts, you’ve got “our commission maximum is 5% of your investment and the market average is 5.5%”. And then there’s an example based on what would that look like for the particular period of time. LEWIS: If you invest £100 a month, the adviser earns £60 a year and that’s clearly set out. WATERS: That information is right there to be seen up front. LEWIS: And you think for example that if we look at this box, and the maximum at this advisers is 3% of the amount you invest. The market average is 1.8%. You think customers will look at that and say, why are you charging nearly twice the market average? WATERS: Well that’s the kind of behaviour that we’re looking to encourage. And in the testing that we’ve done it’s quite interesting to see the light bulb go on in people’s minds – oh. You did see consumers begin to question these numbers, the point of that then being to strengthen the competition in the market because competition is the thing that ultimately will limit the kind of negative incentives sides of commission. LEWIS: The menu has been widely welcomed. But it does run into one major problem. Although there are lots of numbers, the menu only shows the commission paid on seven basic products – missing out, for example, precipice bonds and splits which have been involved in recent mis-selling scandals. It also boils down the 1200 different ways commission can be paid to just a few basic types. And it can understate the amount of trail commission. The Association of British Insurers accepts the industry should simplify those 1200 commission structures. But it still hasn’t decided exactly what changes should be made. Mick McAteer of Which? agrees the menu is an improvement. But he argues it only serves to shine a light in the dark corner. Not get rid of the spiders. And he says the ABI must address the fundamental conflict of interest between advisor and customer. McATEER: I think any reform of the commission structure or the payment system within the financial services industry has to address three core objectives. First of all, it has to keep advice affordable. Secondly, it has to break the link between the product manufacturer and the adviser, so it removes any perception of bias. Thirdly, it really must put consumers at the heart of the transaction. LEWIS: There are indications that some companies are responding to this challenge with their own solutions. Scottish Life, for example, which sells pensions through IFAs, has come up with a new system to pay them called Financial Adviser’s Fee. Pensions Marketing Manager Mark Polson explains. POLSON: The point of financial adviser’s fee is to be as transparent and open as possible. rather than the provider saying to the IFA, “okay, we can afford to pay you a certain amount for introducing that piece of business to us”, what we’re saying is Mr IFA, you have a discussion between yourself and your client about how much you need to charge for your services and quite simply then we just deduct that amount from the customer’s fund. If it’s regular saving, so they’re saving monthly, then we’ll deduct it over 12 months. Or if they’re putting in a lump sum, then we’ll deduct it in a one-er at the start. LEWIS: The company says six out of ten IFAs it deals with have signed up. They get an agreed amount. But the customer doesn’t have to pay it upfront – the key point that puts so many of us off fees. But however innovative, this is just one idea from one company. The kind of industry wide change which critics argue is needed will only come through broad consensus. And the Association of British Insurers has made it clear it can’t, won’t, force through change without it. MCGEE: We have no monopoly of wisdom here at the ABI. We want to have these issues debated. We want to build a consensus. We want to produce a plan of action that the whole industry, including the advisory community, that consumer groups, that policies, that regulators, that everyone else can buy into because it’s only with that kind of base that you can set up some change that lasts. LEWIS: But that will take time – the ABI doesn’t plan to produce firm proposals until the end of this year and any actual change would be some time after that. The problem may have been taken out of the too difficult basket but it seems stuck in the pending tray. And that’s not good enough for others in the industry, like financial planner Gill Cardy who says we need change and we need it soon. CARDY: I think it’s brave of the ABI to start the debate but I think they may need to be prodded along by the consumer lobby to make sure that actually something comes of this and that consumers, product providers and advisers all benefit from a greater clarity in the market. LEWIS: And ready as ever with a timely prod is Mick McAteer from Which? who says that unless the conflict of interest that commission causes is resolved, consumer confidence in financial services will remain low – just when we’re all supposed to be saving more. McATEER: I can’t overstate the need to restore confidence in the UK’s financial services industry given the pensions crisis we face. I think if you look at what’s happened over the past two decades, we’ve seen a huge litany of mis-selling scandals and rip-off scandals that has left a legacy of mis- trust. If we do want to make progress we must tackle the root causes. To paraphrase a famous statement, “we must be tough on mis-selling, but tough on the causes of mis-selling”. Ultimately that must be the best way to restore confidence in the industry. LEWIS: The regulator tries to be tough on mis-selling itself. And most financial advisers find their own way to give good advice in a commission driven world. But unless the industry tackles the fundamental conflict of interest between client and adviser, it will not have tackled the causes of mis- selling at all. And that would be a real sin of omission.