Abuses in the game of life: Those who sell financial services to the public have recently joined the ranks of the most hated figures in Britain. Richard Thomson explains why
Sunday 24 July 1994
Last Monday, the Nationwide building society suspended its 1,300 financial services sales force for extra training following criticisms by Lautro, its regulator. On Wednesday, Barclays Life was reprimanded by the Savings and Investment Board, the ultimate regulator, for failing to match required training standards for its sales force. In embarrassment, Ken Bignall, who is the head of Barclays Life, resigned his directorship of the Personal Investment Authority, the life industry's new regulator which began work last week.
The PIA itself, in vetting all firms applying to come under its jurisdiction, has found that around two thirds fail to train their workforces up to the required standard. The regulatory agency it is replacing, Lautro, has in the meantime fined 23 life companies a total of pounds 2.8m over the past 18 months for failing in various ways to adhere to the standards.
These are official confirmations of what the public has always suspected - that the life companies are not entirely trustworthy. A survey by the National Consumer Council of the public's view of the industry to be published next week will reinforce this suspicion - it shows that only 25 per cent of policyholders are confident that they were sold the right life or pension products by their financial advisers.
The Office of Fair Trading bore this out last month, when it questioned whether the industry was deliberately selling inappropriate policies for profit. It pointed out that up to 60 per cent of the 100 million life policies in existence are likely to be cashed in early (a sign that policyholders are not satisfied with them) with derisory or negative returns.
Among the main horrors was the pensions transfer scandal that erupted earlier this year over the sale of personal pensions. Some 400,000 people since the late 1980s are thought to have been sold such pensions, moving out of the state scheme when they should not. The life companies, meanwhile, made large profits from the business.
What these events show is that, quite suddenly, a crisis has descended on the life assurance industry. It is as if a stone had been lifted to reveal a pit seething with a host of unmentionable evils.
Despite the complexity and frequent obfuscation surrounding the selling of life insurance, the underlying problem is quite simple. Until recently, the standards in much of the industry have been extremely low, and they continue to be so.
Insurance and pension policies are highly complex and not easily understood by the public. They do not sell themselves but have to be sold, and the public has to rely on the advice it is given by the experts- the life salesmen. But the advice has clearly been flawed in some areas, and the regulators now appear to be confirming that the salesmen, if not actually dishonest, are inadequately trained to do their job.
This is hardly surprising. Until the Financial Services Act was introduced in 1987, life insurance salesmen were not required to have any formal training at all. 'You could come out of jail and immediately start selling life assurance,' said one senior figure in the industry. 'The FSA looked for standards where they didn't exist before.'
Once training became obligatory, it often consisted of a week or two of cramming for groups of salesmen herded into a hotel for the purpose. 'When we were being trained we were, in effect, given scripts to learn,' said Roddy Kohn, a partner of independent financial adviser Kohn Cougar who began as an ordinary salesman.
'New salesmen were given a phone book to fill in with the names and phone numbers of their friends and acquaintances whom they were then supposed to sell policies to. The whole emphasis was on selling a lot of policies. You had a lot of idiots out there. A lot of the wrong policies were sold to the wrong people.'
The principle followed by almost all life companies of paying salesmen by commission put enormous financial pressure on them, at the risk of overriding their moral scruples about selling the right policies. Although the most successful salesmen can earn substantial amounts, many find it hard to keep their heads above water. The average earnings of life assurance salesmen are modest - pounds 12,000 a year. 'Out of 50 pitches you might get one favourable response,' said one former salesman. 'Of course, you did what was necessary to turn that into a sale.'
'You were encouraged to tell anything to anybody,' said another salesman. 'You were self-employed on commission.'
As long as this system worked without too much public disquiet, the industry had little obvious incentive to put more effort into training. The cost of training new salesmen, after all, is very heavy - some industry estimates put it at around pounds 100,000 per salesman. The turnover in the industry, moreover, is high. 'It is a very lonely job, and you have to put up with rejection all the time,' said Ken Bignall, head of Barclays Life. 'Inevitably, a lot of people find they cannot take it for long.' Many firms find that 30 to 50 per cent of their salesmen leave each year, requiring them to train new ones all the time at great cost.'
'Of all the people on the training course with me,' said a former salesman, 'a vast number never brought in any business and left very quickly.'
Nor did the industry's new regulators initially require companies to improve their training standards. For three or four years after the FSA was implemented, little or no pressure was put on life companies to pull their socks up. Lautro, for example, did not give itself powers to fine its members until 1991. The first fine, imposed on ManuLife, was not imposed until May 1992.
The fragmented self-regulatory structure divided between Lautro, Imro and the SIB may have contributed to the slowness of the regulators to tighten up on the industry. But many argue that the real problem was the way the FSA encouraged the creation of tied agents - salesmen selling the products of one company only - at the expense of independent advisers. Inevitably, direct sales forces grew rapidly - too rapidly, perhaps, for the industry to keep control of them.
But others argue that self- regulation is the real problem. Run by the practitioners themselves, the regulatory agencies did not have sufficient incentive to clean up the shop. 'Vested interests have undoubtedly held up what progress has been made,' said Roddy Kohn, a council member of Fimbra and a member of its training and competence committee. Some critics suggest the practioners were so close to the industry that they could not even see that any problems existed.
So why have the regulators started getting so tough on life companies now? Why the fines and reprimands, followed by the earnest declarations of improvements from the companies themselves?
It was the scandals such as Maxwell and Levitt that alerted the public to the fact that City regulation was not working effectively, at least where personal savings were concerned. Even more damaging for the life insurance industry has been the public disillusionment with some widely bought products. Millions of mortgage endowment policyholders, for example, are now wondering whether their policies will ever cover the value of their home loan as intended. And there have been the scandals over personal pensions, where the companies appear to have been knowingly selling, or 'mis-selling' in the industry jargon, products that were not appropriate to their customers.
The SIB is currently working on a method of identifying which policyholders have lost out financially and how to recompense them. But the regulators have also seen the need to avoid further scandals over the longer term by improving the training of salesmen. The powers to do so were always contained in the FSA, but it was not until two years ago that the regulators started interpreting them more strictly.
Despite the self-regulatory nature of the system, the life companies have been curiously slow to spot what the regulators were doing and to respond. The problem is well illustrated by the case of Barclays Life, whose chief executive, Ken Bignall, was part of the regulatory structure - a director of the PIA for all of two days after it began operating. 'The regulators have changed the way they interpret the rules. A few years ago, the new rules were not seen as necessary - like seat- belts in the back seats of cars. Perceptions change, and the industry has not acted fast enough. I was personally aware of the way the PIA wanted to change the regulations in the future, but I did not realise the SIB was doing it already.' Barclays was duly reprimanded by the SIB.
Other leading companies that have been too slow to escape the blame of the regulators include Guardian, Scottish Widows, Norwich Union (reprimanded twice), Cornhill, and Legal & General. The head of L&G when it was reprimanded was Joe Palmer, who is now the chairman of the PIA - a fact that is causing concern among people who believe that the self-regulatory system needs to be whiter-than-white to regain public confidence.
In most cases, these companies have been blamed for not training their salesmen for long enough, for not checking their work thoroughly enough and for not supervising them closely enough. Nationwide, for example, has sent its sales force off for several weeks extra training. Barclays Life has doubled its training time from four to eight weeks. It has also instituted a system of double checking the sales of its agents to ensure that they have sold the right products to the right customers. From next year, salesmen will also have to state their reasons for selling someone a particular product in a 'reasons why' letter sent to the customer before the sale.
But the regulators are no longer leaving the responsibility for monitoring salesmen to the companies themselves. The PIA is considering setting up a register of every individual salesman so that rogue agents who move from company to company can be tracked and punished if they step out of line. If companies fail to censor them, the regulators can.
At the same time, some companies are doing away with the reliance on pure commission as a way of paying salesmen. Barclays Life pays a basic 'living' wage of around pounds 15,000, to ensure that salesmen are never so financially desperate, it says, that they will be tempted to mis-sell a product. Nationwide's sales people are paid largely on a salary basis.
'I believe that commission- only selling has potential dangers which cannot be regulated away,' said Mr Bignall.
It is likely, however, to be a long time before commissions disappear - if they ever do. Companies are loath to do away with the powerful incentive that commissions provide. Anyway, they point out, if salaried staff are obliged to meet strict sales targets to justify their pay, the pressure to sell hard is just as strong.
Some in the industry admit that the improvements now taking place are long overdue. 'I do believe the standards are not good enough,' said Mr Bignall.
But the industry's defenders claim this is simply a natural process of raising standards. 'It is too much to say that the industry should be ashamed of the scandals,' said a senior statesman of the business. 'It is part of a historical trend that the industry is moving into greater professionalism.'
On the face of it, greater professionalism is almost certain to add to the costs of life assurance. Longer training not only costs more but means salesmen are off the road for longer periods; interviews with customers may take more time; more supervisors will be needed to oversee the salesmen; the paper work will increase as companies make more effort to check their employees' work.
Higher costs, ironically, may make life insurance harder to sell. In the end, however, the real cost to the public may not be any greater than it is now. As Mr Kohn pointed out, people who buy the wrong life insurance product and then terminate it early are already paying dearly for such mistakes, since a substantial part of their investment will be retained by the life company when the policy is cashed in.
The OFT report last month even questioned whether companies were deliberately selling the wrong policy to people so that this would happen, thus boosting their profits. 'For some companies,' said Sir Bryan Carsberg, the Director-General of Fair Trading, 'the pattern of profits suggests that returns are higher when more policyholders surrender early with significant losses.'
If companies and regulators are serious about wanting to stamp out such abuses, the public will no longer risk this extra financial penalty. Policies may cost more up-front, but at least they would be the right policies.
For the foreseeable future, however, although salesmen may be rather better trained than in the past, the methods of selling life assurance seem unlikely to change greatly. 'I can't always be certain that none of my salesmen may be under the kind of financial pressure that could affect the advice he gives,' said Mr Bignall.
'We cannot say whether the quality of financial advice has got better or worse,' said David McNeill of the National Consumer Council. 'The trouble is that the whole question of mis-selling is a hidden issue. Because of the complexity of life insurance, you won't necessarily know you've been mis- sold a product. Consumers can be in ignorance of just how poor a deal they have got, so it will never show up on the statistics.'
What is certain is that both the industry and its regulators are now on trial. To restore public confidence in the industry, they need to prove that together they can improve the quality of their performance. It will be a long task but they can perhaps take comfort from the fact that their reputation can hardly sink any lower.
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