Cicero Policy Briefer

Issue 12, May 2007

Getting products from B to C:
What will the FSA review mean for retail distribution?

By Mark Twigg

It has been over six months since the FSA Chairman Sir Callum McCarthy first suggested that the financial services distribution model was bust, operating neither in the interests of the industry nor its customers. And with that proverbial stick of dynamite the regulator blew open one of the most divisive industry debates in years—not to mention one of the FSA's most wide-ranging reviews of the retail market. With not so much as a public consultation to its name, the FSA's retail distribution review continues to ruffle industry feathers.

For the uninitiated—yes, there are still rather too many of you—the review is examining a wide range of issues through five separate groups, each focusing on one of the following:

• The sustainability of the distribution sector;
• Incentives to intermediaries;
• Professionalism and reputation;
• Consumer access to products; and,
• Regulatory obstacles

The FSA is also looking at wrap propositions and retail savings, though it is the issue of remuneration has been making all the headlines with yet another re-run of the commissions versus fees debate. Now the Association of British Insurers (ABI) has waded into the debate—albeit rather inadvertently—with a leaked position paper calling for an end to commissions.

According to the leaked document, the ABI wants to see an end to the industry practice of paying commissions to brokers in favour of 'customer agreed remuneration for intermediary services', or 'CARIS'. A euphemism for fee-based pricing! While a fee-based approach would have certain advantages, most notably greater transparency, it is by no means a panacea for the current blight of commission-bias. For a start, it is not at all clear whether fee-based business is commercially viable in certain markets.

Unsurprisingly, the ABI’s position has pitted providers against distributors in what has been called the body's strongest attack yet on the intermediary sector. Controversially, the ABI is also calling for an opt-out for single-tie arrangements. This particular demand is a subtle shift in a debate which has focused to date on carving out particular products.

The FSA review team has been at pains to stress that the review will be only considering investment products. More recent additions to the FSA's areas of competence, such as general insurance and mortgage sales regulation, are unlikely to drift onto the radar (though that can’t be ruled out at this stage). For its part, the industry has been stressing why the market for non-investment business merits the continuation of commissions. Consumers in these markets generally don't want to pay fees, hence the concerns over commercial viability. Also, the problems of churn tend to have different drivers when compared with retail investment products. Rather than commission-bias, it tends to be influenced by factors such as changes to market rates, the development of new products or changes to the individual's personal circumstances; this may all mean that the need to re-broker an existing product could actually be well aligned with the consumer's interests.

Now the ABI is seeking to turn that debate on its head with a possible carve out for specific distribution channels. The rationale for this approach is less persuasive. Discriminating the pricing model on the basis of distribution channel creates an obvious unlevel playing field in which identical products would be subjected to different pricing structures depending on how they are sold; a fact which might not be readily understood to retail consumers.

Without pricing consistency between similar or identical products, how will consumers grasp whether they are getting good value for money from the intermediary? It seems clear that a focus on product, rather than how it is distributed, forms a more customer-centric approach when determining the scope of the current review.

To a regulator with at least one eye on the principle of treating customers fairly, that has to be a sensible outcome. The FSA will be setting out more details on its likely approach on 27 June at a specially convened conference, which will no doubt also mark of the launch of the formal public consultation. In the meantime, the ABI has got a lot of work to do to win over the doubters.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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