Reports of the death of commission are premature it seems. The Retail Distribution Review, which will ban financial advisers from earning commission on the products they sell, comes into force on December 31.
But the commission prohibition only applies to investments such as pensions and unit trusts. Other products such as life, critical illness and income protection insurance policies will continue to pay sellers upfront, sometimes as much as the entire first year's premium or even more.
Advisers could collect £1,500 or more on a typical private medical insurance policy, for example.
The fear is that many commission-chasing independent financial advisers, unable or unwilling to embrace the new ways demanded by the Financial Services Authority, are planning to move into complex areas of cover where they may lack expertise thanks to the carrot of huge upfront payments.
Alan Lakey, an IFA at Highclere Financial in Hemel Hempstead, Hertfordshire, believes many ex-investment sellers will move into protection to boost incomes after the commission ban.
He says: "This will be great if more people buy protection plans. But many will sell just on price. Consumers deserve better advice as these policies can be extremely complex so the cheapest may not have the right features for them."
Mr Lakey, who has written an online guide for advisers on critical illness insurance small print, cites huge variations in coverage of cancers and heart diseases.
Most consumers are unaware of how much advisers can earn from a policy sale. Those selling protection can be covered by the Insurance Conduct of Business rules, which do not insist on disclosure at point of sale although customers who ask must be told. Very few enquire.
Confusingly, others are controlled by the Conduct of Business rules, which mandate openness.
Term assurance and critical illness commission rates are identical.These start at 111.86 per cent of the first year's premiums for policies designed to last 12 or more years – the exactness of the figure is lost in history and compound percentages. Almost all sellers receive more, from a 25 per cent to 30 per cent uplift for smaller brokers to 60 per cent more for IFA networks and big online operators.
But if the policyholder stops within the first four years, the broker has to repay part of the commission, known as a "clawback". In addition, sellers receive 2.5 per cent of premiums after the first year. So a £20-a-month pure life policy will earn the seller around £350 while the more difficult critical illness, typically £60 a month, will bring in about £1,000.
Private medical insurance, where often-hard-to-understand policies only last a year, typically pays 45 per cent at the start with 5 per cent each year on renewal. But one leading PMI insurer now offers 90 per cent, possibly negotiable to 100 per cent, of the first year's premiums upfront provided the policy stays on the books for two years.
PruHealth has just introduced this as a new commission option, veering away from rivals which do not compete with each other on payment levels. Some brokers have forecast a rise in poor quality advice and an increase in "churning" (where customers are moved from insurer to insurer to gain more upfront commission).
The 90 per cent is equivalent to around eight years on the more traditional model, leading to accusations that it will attract brokers with lower ability levels, whose interest in a client will cease after two years.
Richard Bamford, at specialist PMI intermediary Citrus Healthcare in Tonbridge, Kent, says: "If someone is paid 90 per cent to keep the business on the books for two years, what is the incentive in year three and beyond to continue servicing the client? This could attract rogue brokers who have no interest in previous medical histories or in the future. And that could lead to churning."
He is also worried that high commission will create bias towards a particular product or company. RDR is designed to prevent this in investment markets where hitherto a customer with £100,000 to invest could produce £7,000 commission in one product and nothing in another.
Brian Walters, of Cheltenham-based Regency Health, also a specialist health insurance broker, says PruHealth has every right to offer whatever commission it wants but he worries this breaking of ranks could distort the market and has the potential to skew advice.
"Will the adviser judge on professional criteria including personal-to-the-client factors, such as previous medical history, or be swayed by high percentages?" he asks. "And what if other insurers follow. They might well do if they see their market positions under threat. A commission war would not be good for consumers."
Rivals Axa-PPP and Aviva say they have no plans to change their present commission structure. Bupa does not underwrite individual health insurance via brokers.
Graeme Godfrey, at BestGoPrivate in Bushey, Hertfordshire, says: "If customers even believe there is commission bias, it would call a PruHealth decision into question even if it was the most suitable policy."
Mr Lakey says: "There is a thin dividing line between churning and re-broking to find a better deal. It is churning if it is carried out to enhance the adviser's earnings.
"There is a danger that if we have an influx of don't-know, don't-care commission-driven advisers, it will produce unwelcome outcomes for consumers and action by regulators fearing mis-selling."
Dave Priestley, a PruHealth director, defends the plan: "PMI is best suited to an advice model so the customer is clear about a complex product. But we want to encourage new advisers including some who may be more focused on initial advice. Advisers who take up our new 90 per cent option should make clear the service customers can expect to get.
"Despite the headline rate, we calculate it will have a neutral effect on premiums. Our average policy lasts seven or eight years so whether we pay the new structure or the traditional and still available 45 per cent initial and 5 per cent per year after that is immaterial.
"we are aware of criticism that says our new structure encourages churn. To counter the risk we shall vet brokers to see it is appropriate for us to work with them."