Another successful joint event with the Insurance Institute of Bristol brought an audience of around 70 people on a cold snowy afternoon at Axa on the edge of north Bristol. Fay Goddard Director of Policy, AIFA and Peter Williams Head of Industry Development at Aegon UK gave an interactive presentation.

We began with six questions testing the limits of our knowledge on the use of initial disclosure documents (IDD) and the Menu. The answers offered were interesting with a split in the response and a large number of ‘don’t knows’. Clearly the whole issue of how to handle these documents is very complex indeed.

There was considerable confusion over use of the IDD on 14 January, as it was not mandatory although an easy way to meet the basic requirements of disclosure for implementation of the Insurance Mediation Directive with the full IDD, being required from 1 June. Many general insurance brokers have queried why they cannot claim to be whole of market for general insurance but FSA insist the shear range of products and firms involved make this impossible. AIFA are challenging this assumption. Another problem for mortgage brokers is that firms must follow the same order as with investment, insurance and mortgages, thus a mortgage broker has to list insurance first even though this may be incidental to their core business of mortgage broking. Where the wording refers to the Menu and an IFA has not introduced the Menu yet because they are yet to formally depolarise they must tick the other box on the IDD and cannot alter the wording in any way.

Recognised professional bodies (RPBs) have yet to clarify the definition of independent, which is inconsistent. The Law Society updated its guidance last October and confirmed that for investment, firms must refer to an IFA but for mortgages they can introduce to a tied adviser or single product provider. If firms are multi or tied for investment business they will receive no introductions from RPBs.

There are 6 versions of the Menu prescribed by FSA and most firms have to use them except stockbrokers who are only required to use it in very limited circumstances. The options available include 1.fee only, 2.commission (or equivalent) only, 3.fee or commission (or equivalent), 4.fee or commission (or equivalent); or commission (or equivalent) and top up fees, 5.commission (or equivalent); or commission (or equivalent) and top-up fee; and 6.fee; or commission (or equivalent) and top-up fee. Quite an array of choices to blow the mind of any high street broker or IFA!

Looking specifically at version 4 firms need to tackle the various types of fees applicable and how to charge them, bearing in mind firms need to be able to demonstrate the fees they are charging are fair and reasonable. Where hourly rates are used it will involve firms in keeping time sheets. For fixed rates there may be some scope to be flexible and it could replicate commission but care needs to be exercised to make such fees generic rather than match to a particular product group where it could be seen to be product biased.

Retainers are straightforward and many firms in the US make most of their money through retainers. However it needs to be clear what is provided for the retainer.

Contingent fees based on whether a product is sold, is proving popular in some quarters although it appears questionable who would want to use this approach.

If you charge fees you may differentiate according to experience, qualifications and status of the individual concerned. There are challenges in the record keeping required to charge the appropriate rate according to who works on a case.

VAT has been clarified through the February 2003 guidance note obtained by Sandler. An act of financial intermediation i.e. to sell a financial services product is not vatable but other services are. Very careful wording is necessary to point towards the purpose of selling an insurance or investment product through the advice service rather than a purely holistic financial planning service, which may be subject to VAT. For a network the necessity to apportion every fee across each appointed representative and keep comprehensive records is a real challenge and extremely complex process if VAT is to be avoided.

Fee based only IFAs do not need to include the commission tables in the Menu but where commission is taken full details must be included. Unfortunately there are a number of challenges to the market data used by FSA, which AIFA have managed to obtain detailed background as to their source. For example the definition of investment bonds includes a wide range of bonds including guaranteed growth bonds that form a small part of the advised market and pay very low commission rates thus distorting the market rates downwards. The data also includes fee-based advisers who may take some commission and also fund supermarkets again putting downward pressure on the market average. Personal Pensions and stakeholder are also taken together even though stakeholder pays much lower commission and it fails to take account of the introduction of the basic advice regime. AIFA are keeping OFT informed, as they will be interested in the anti-competitive pressures involved.

AIFA suggests firms wait until after April when the market data should be revised by FSA thus saving time in having to produce menus twice in such a short period. A case study menu was then reviewed by the audience and discussed. The prescriptive way the Menu has to be produced, including the first three sections on one page and only leaving limited space to provide firm specific information, leads to the conclusion that further brochures and information will be necessary as part of a package of information to provide to the customer. A Terms of Business letter will still be required and a real description of the specific services a firm can offer would need to be set out separately from the Menu.

AIFA have expressed concern about the ABI’s approach to commission, which represents a major revolution in the way intermediaries are paid including scrapping of indemnity commission, an annual statement o commission paid with the client’s right to redirect or stop commission in their favour and the threat to trail commission. None of these proposals are comfortable reading for IFAs. The pressure to move to fees is strong although protection products are not subject to the Menu so an IFA could claim to be fee only and still receive commission on non-investment insurance contracts. However it is all meant to be about being clear and transparent so IFAs will need to be ethical in their approach.

In conclusion firms need to make the Menu work for them. There was also a plea for firms to consider whether they were in the right professional bodies, as this will be a way they can distinguish themselves in the services they offer with the Menu. A really informative and interactive session where a practical demonstration of the impact of mass disclosure of information to consumers is just as confusing to the industry let alone the customer.

Anthony Smith FCoI

Published: May 2005
By: Anthony Smith

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