James Daley: When will the regulators crack down on excessive charges?

The Financial Services Authority (FSA) was quick to try to play down rumours that it is investigating investment fund charges and commissions in the life assurance sector this week. But if it isn't, then it darn well should be.

The Financial Services Authority (FSA) was quick to try to play down rumours that it is investigating investment fund charges and commissions in the life assurance sector this week. But if it isn't, then it darn well should be.

Unit-linked life products have long provided bad value for the consumer, not just in terms of their high charges, but also in terms of their far inferior performance. But the need to put them in the spotlight is more important now than ever, with an increasing number of financial advisers using them as a substitute for with-profits bonds - which their clients are now (rightly) reluctant to touch after the bad publicity of recent years. Sales of unit-linked products during the past year have soared.

The worst offenders in the insurance market now pay financial advisers more than 7 per cent commission up front for a life bond sale, a charge that is often entirely borne by the customer. Skandia, the most generous of all (to advisers, not its customers, that is), will pay an enormous 8 per cent of your lump sum investment to your adviser, or just under 7 per cent plus an annual commission of 0.25 per cent.

While the poor performance in life bonds can often be accounted for poor management, even those which invest in high-quality underlying funds see their performance eroded massively by the enormous charges.

A sum of £10,000 invested directly in Invesco Perpetual's High Income fund 10 years ago, for example, would now be worth £33,140. But if you'd invested in exactly the same product through Skandia, it would be worth just £28,640 - a full £4,500 difference, most of which is accounted for by their fees. Such charges and commissions simply cannot be justified. While financial advisers may need to be able to put food on the family table, their remuneration should at least bear some resemblance to the amount of work that they have put in on behalf of their client.

Qualified investment advisers that build a balanced portfolio of funds for their client will receive a maximum of 3 per cent up front, and 0.5 per cent annually.

But those who put their clients into one-stop-shop life funds will get as much as 6 per cent up front and 0.5 per cent annually - or even a whopping 8 per cent up front if they're willing to sacrifice their annual commission.

Having recently completed the biggest reform of the financial advice market in two decades, it is a shame that the FSA has failed to address this most fundamental issue.

While those advisers who wish to keep their "independent" tag will now have to offer customers a choice of fees or commission, the many that choose to tie to a handful of providers - as they now can under the new rules - will be subject to no such discipline. So commission will continue to be king.

Any life insurance company chief executive will tell you (off the record, of course) that the way to increase their sales is to put up commission - stark evidence that many advisers still make recommendations in the best interests of themselves, not their clients.

Perhaps having kicked the life industry so hard during the past few years, the FSA is giving them a breather before it starts on this crusade. But consumer groups will surely not put up with such exploitation for too much longer.

* Stelios Haji-Ioannou took another step in his progress towards world domination this week, announcing his launch into the home insurance market. Although it's good to see some new competition in a market reported to have seen premiums rise by 25 per cent in the past six months, I hope his company's approach to finance is not exactly the same as his approach to everything else. If easyrentacar is anything to go by, expect prices to start cheap and get more expensive as the company thinks of more add-ons and bizarre clauses to hit you with. Claims of over £10,000 will only be accepted if you're left-handed? Hopefully, not. Few financial services firms have made money by cutting corners. Let's hope Stelios is well aware of this before he has a problem on his hands.

The number and size of mortgage fees shocks me

After more than two years of dithering, I've finally got round to buying a flat this month. Please don't read this as any kind of endorsement that the housing market is safe to venture back into (I'm as petrified about the prospect of negative equity as the next person).

But what astounded me about the whole process is the sheer number and size of fees I will have to pay for my mortgage. While charges have always been high, a report this week from Charcol, the broker, revealed that the average mortgage arrangement fee has gone up by 42 per cent in the past six months. Another broker, Savills, pointed out that many other mortgage charges are on the rise, with some providers inventing new fees to boost their profits.

While the rate on my Bristol & West mortgage sounds reasonable, I soon found a section on their website that turned my stomach - a six-page list of no fewer than 25 possible levies that I and other customers could be landed with.

Although higher fees may be the price we pay for more competitive interest rates, the sheer number of penalties and levies flies in the face of the idea of a simple, consumer-friendly mortgage market. Worse still, the vast majority of these fees are not detailed in the "key facts" document that the lender sends out.

In spite of the regulator imposing a new, stricter rule book on the sector three months ago, it would seem there is still plenty of room for improvement when it comes to transparency in the mortgage market.

j.daley@independent.co.uk