Although this is a low-profile initiative, it is probably of greater long-term importance than the more newsworthy but seemingly never-ending reform of the system of investor protection. Higher professional standards among salesmen would do much to eliminate the industry's fundamental problem - the frequent sale of inappropriate or unnecessary policies. The origins of the new training regime lie in a report by Oonagh McDonald, the former MP. Dr McDonald found standards of competence in the financial services industry to be fragmented and inconsistent, and recommended that regulators should make clear what was required.
Financial advisers have traditionally joined the life insurance industry by becoming a salesman for a single company. In the past, new recruits were often given no more than elementary training about a simple savings plan, before they were given a telephone and told to start selling to their family and friends. Not surprisingly, many sank without trace before they learned to swim, leaving only a few quickly cancelled policies to mark their passing. This culture has produced salesforces with alarmingly high levels of personnel turnover, a feature which is in the interests of neither the customer nor the life insurance companies.
In future, life offices must have their training schemes approved by the Life Assurance and Unit Trust Regulatory Organisation (Lautro). Companies are currently in the process of obtaining Lautro accreditation for their procedures before the new system becomes fully operational later this year.
Lautro's aim is to ensure that salesmen demonstrate they are able to analyse their customers' circumstances and requirements and to identify the most suitable product for them (if any). Salesmen must be able to show they can present information to investors in a comprehensible and unambiguous way. They must also be able to process the policy effectively.
These goals are much the same as those of the 1986 Financial Services Act, the basis of the current system of investor protection and the legislation which gave birth to Lautro and its fellow regulators. While these standards might appear to be the least consumers should expect to receive, insurance salesmen have frequently failed to live up to them.
One of the best illustrations of this has been the controversy surrounding home-income plans. In the late 1980s, when house prices seemed to be rising inexorably, some insurance advisers encouraged elderly investors to supplement their income by remortgaging their homes to release a sum of money to be invested in an insurance bond. The recession in the housing market and poor investment returns have combined to leave many investors facing serious problems. It has become clear that, in many cases, insurance salesmen failed to ensure that investors understood the risks they were undertaking.
Even mortgage endowment plans, one of the insurers' most widely sold product lines, is susceptible to criticism. Many thousands of mortgage endowments are cashed in long before they are due to mature, at substantial cost to the surrendering policy holders. If home owners had a better understanding of the plans, and the consequences of future changes in their financial circumstances, they might prefer to use a more flexible method of repaying their mortgage.
The increased amounts which life offices will have to spend on training will encourage them to pay greater attention to the quality of business they receive and less to the sheer number of salesmen. In common with many of its competitors, Abbey Life suffered a decline in the size of its salesforce last year, from 3,500 to 3,200. Stephen Maran, chief executive of Lloyds Abbey Life, Abbey's parent company which is itself controlled by Lloyds Bank, believes there will be further shrinkage as the new training regulations take effect. 'The change we have seen this year could easily happen again,' he says. 'What I am hoping is that this step-up in training and competence will turn out to be good business and will lead to more satisfied customers.'
A parallel training initiative to the Lautro scheme is being undertaken by the Financial Intermediaries, Managers and Brokers' Regulatory Association. Fimbra is responsible for regulating independent financial advisers, firms which are authorised to recommend products from a wide range of companies rather than just one. Traditionally, many insurance advisers have moved on to become IFAs after gaining a grounding in the industry from a company direct salesforce.
Fimbra has introduced the Financial Advisers' Competence Test (Fact) which new entrants to the industry must pass before they are entitled to deal with the public. Godfrey Jillings, Fimbra's chief executive, has made clear that the initial standard of Fact was set lower than is considered necessary. Its contents have recently been extended and it has been upgraded so that Fact counts towards the financial planning certificate issued by the Chartered Insurance Institute.
Fimbra is keen to promote steadily rising levels of professionalism. With this in mind, it has just completed a pilot programme of continuing professional education (CPE) involving some 2,000 volunteers from among the 21,000 individuals whom Fimbra registers to give investment advice.
CPE embraces training, updating of knowledge, study for qualifications, skills and experience. Each registered individual is intended to devise a personal programme which should involve a commitment of at least 50 hours a year. At the launch of the pilot, Mr Jillings claimed Fimbra members already spent at least this amount of time on similar activities but not in such a structured manner.
Mr Jillings adds: 'The CPE programme . . . will deliver a 'ratcheting' of professionalism as the system encourages the individual to strive for higher levels of qualifications, training, knowledge and updating year on year.'
The intention is to make CPE a requirement for financial advisers to enjoy continued authorisation. Writing in Fimbra's latest newsletter to its members, Keith Popplewell, author of the Fact course, says the initial feedback to CPE was so encouraging that it is only a matter of time before it becomes a requirement. He adds: 'This could be implemented later in 1993, and my belief is that the required minimum of time commitment will exceed the 50 hours per year level of the pilot scheme.'
The longer-term future of the Lautro and Fimbra training schemes will depend upon the on-going shakeup of the regulatory system. The two watchdogs are planning to merge in a new body called the Personal Investment Authority (PIA), which is supposed to take on responsibility for protecting private investors.
However, the formation of the PIA has been fraught with difficulties, not least among them the reluctance of the banks to commit themselves to join. The banks' life insurance subsidiaries are capturing a growing share of the market but they are wary of being asked to meet compensation claims arising from the failures of Fimbra member firms.
Another serious obstacle has just been raised by the Securities and Investments Board, the senior financial regulator. In a letter which betrays dissatisfaction in the regulatory record of Fimbra and Lautro, Andrew Large, who took over as SIB chairman last June, has called for 'a step change in standards and practices in this market place'. The creation of the PIA, intended to take place by July, looks set to slip by at least six months.
Whatever the final shape of the regulatory structure, it seems highly unlikely that training requirements will be relaxed. Would-be salesmen must learn to live with them.
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