Despite the many barriers that have been placed in the way of Independent Financial Advisers (IFA's), they are the most successful distribution channel for life insurance. This article examines whether the Retail Distribution Review (RDR) due for implementation at the end of 2012 will change that.
UK Specialist Independent Financial Advisers (IFA,s)
The introduction of the Financial Services Act 1986 was responsible for setting out regulations for the sale of investment business in the UK. This included both fund management activities and life insurance, except for short-term protection products with no investment element, and in effect it was the starting point for independent financial advisers (IFAs) as they are now recognized. The Act stated that a financial advisor must provide the best advice regarding the most suitable product for a client, having first established a full understanding of the client's financial background. The increased regulations created a substantially increased burden for self-employed advisors and the market had serious concerns that the IFA sector would collapse. These concerns led to the development of IFA networks.
The concept of a network is that all the compliance, regulatory authorization and ongoing training are dealt with centrally at the network head office. The network makes each IFA firm an “appointed representative." The IFA firms maintain their independence, and are effectively outsourcing compliance and administration to the network, in return for a fee. When business is submitted, rather than being sent by the IFA firm to the provider, it is sent to the network head office for onward transmission. To a large degree the creation of the network concept in the late 1980s and early 1990s was responsible for the growth of business through the IFA channel. At their peak in 2002 over half of all IFAs were members of networks while the market share of IFAs had risen to about 60% from a pre-regulation share of 20%. Despite the barriers that have been placed in the way of the IFAs, they are the most successful distribution channel in the UK and account for approximately 80% of all individual pensions products sold and well over 50% of investment and savings products.
Since the "depolarization" rules came into effect in 2005, an additional title has been applied to IFAs, which is Whole of Market (WoM). This clarifies what an IFA can do. For example, an insurer’s products sold through a distributor are classified as IFA/WoM if the products have been selected from an unrestricted range of products from the whole market. If an intermediary forms a panel of insurers based on best advice criteria selecting the insurer from the whole of the market, and places most of the business with these insurers, then this is classed as an IFA/WoM distribution channel.
Retail Distribution Review
In June 2006 the Financial Services Authority (FSA) launched the Retail Distribution Review (RDR) in response to recurrent problems in the market for the distribution of retail investment products. The review brought the FSA, industry and consumer representatives together to find solutions to market inefficiencies that would be acceptable both to consumers and to companies. Various discussion papers and interim reports have followed, the purpose being to trigger widespread debate on how to improve the effectiveness of the retail market for the distribution of regulated products including pre- and post-retirement products, savings, life assurance and other investments. An important part of the FSA proposals is the introduction of minimum qualification levels and requirements for continuing professional development for advisers from the end of 2012. A Professional Standards Board will be set up within the FSA and advisers will follow a compulsory ethical code. Although membership of a professional body will be encouraged, firms will retain responsibility for the standard of advice given by the advisers working within the firm. The FSA will set up a public register of authorized investment advisers, giving details of their professional qualifications and their membership of professional bodies.
Retail Distribution Review (Pensions)
The Financial Services Authority (FSA) published its RDR consultation paper 09/31 entitled "Delivering the RDR" on 16 December 2009. This outlined proposals for enhancing professionalism, applying RDR to corporate pensions and initial proposals on applying RDR proposals to pure protection products. The GPP market (group personal and stakeholder pensions) is significant, representing nearly GBP 2.7 billion in new regular contributions during 2008, serving over three million members. It offers an ideal way for employees, including many on modest earnings, to make regular tax-efficient savings for retirement, with the major added benefit of an employer contribution. For government pensions reforms to be successful, these schemes must continue to do this alongside personal accounts after 2012.
The current proposals for the corporate pensions market, covering group personal pensions, group stakeholder pensions and group self-invested personal pensions (all referred to as GPPs) include a ban on payment of commission for GPP products and sales, for both advised and non-advised services. A consultancy charge would be permitted to be taken from GPP contributions or members' accounts, as agreed between employers and advisers. The consultancy charge can include a separate member advice charge when members accept individual advice.
It is proposed that the ban on provider factoring (already proposed for individual investments) should extend to consultancy charging under GPPs. Commission would continue on existing GPPs set up before the ban on commission is implemented, including those for new members and increases in contributions for existing members. Disclosure would be required by advisers to employers of the total potential adviser remuneration. The ban on commission to investment products linked to occupational pension schemes sold as alternatives to GPPs would be extended.
UK Employee Benefits and Actuarial Consultants
The UK pension and related benefits market is complex. It has matured over many years and it is fair to say that it has been considerably influenced by consultants developing innovative ideas and at times pushing the boundaries of HM Revenue & Customs (HMRC) regulations. The development of the modern pension fund, executive schemes and many other products has been driven by the consultancy sector while the dividing line between employee benefit consultants and consulting actuaries has become so blurred over the years that, as far as the larger operations are concerned, it no longer exists.
The services of consultants are far wider than advising and setting up pension plans. The larger ones provide actuarial, legal, communication and administration services. Some provide computer software for administration and payroll systems, while others have branched into remuneration and human resource consulting activities. The international consultants have tended to grow by acquisition rather than organically. There have been a significant number of acquisitions which span the world, and these have resulted in consultants being able to service the needs of UK-based multinationals.
UK Life Insurance Distribution (A Definitive Guide - Part 2)
These articles complete the guide to the UK life insurance distribution market (the first four published in February). The first deals with the IFA market (the most successful in the UK) plus other distribution methods whilst the second deals with consumer protection and intermediaries commissions.
- UK Life Insurance Distribution (Independent Financial Advisers, Employee Benefit Consultants)
- UK Life Insurance Distribution (Intermediary Disclosures and Consumer Protection)