David Prosser: The beginning of the end for the savings market as we know it

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The Independent Online

Outlook For Standard Life and its rivals in the UK life and pensions sector, the next 18 months will see a phoney war. The real action in this marketplace begins at the end of 2012, when the Financial Services Authority at last implements the recommendations made by its retail distribution review, a process that began five years ago. The most significant of these reforms will be an end to commission payments to independent financial advisers from product providers.

Standard Life claimed yesterday that it is well-placed to benefit from this change, since it has already dropped such commissions. So it may prove, though one imagines that the headstart is going to be very shortlived. In fact, the abolition of commission, which is long overdue, ought to be of real benefit to many life and pension providers.

For several years now, this has been a market in decline for all but the very biggest players. The cost of paying a commission to an IFA for selling a product means the provider does not begin making a profit on its new customer's business for several years. And since the sales commission system incentivises advisers to keep introducing their clients to new product providers, the customer invariably jumps ship well before that break-even date.

The business model of the insurance sector was miserable enough before the financial crisis: compare the total new premiums claimed each year by the big insurers over the five years to 2008, say, to the industry's total increase in assets under management, and you'll see that most sales were churns of existing clients rather than genuinely new business to the savings industry. Even worse, when thecrisis hit, savers began taking their money out.

That prompted an exodus of product providers from the UK life and pensions sector, where scale has, until now, been the only way to make a return, certainly from the mass market. The abolition of commissions, however, will begin to redress the balance.

What the new model should mean is that savers' money gravitates towards the best providers of savings products, rather than those insurers that pay the biggest commissions (or have sufficient scale to generate low enough costs to cope with the issue of persistent churning). That's good news for consumers, of course, but also for those product providers which get their act together before the end of next year.

Their fortune will not, however, be shared by all IFAs, many of whom fear a good proportion of consumers will not be prepared to pay fees for financial advice, even if they do not have to pay upfront. The FSA reckons that as many as 13 per cent of these advisers may go out of business because of its reforms, though that will include a number who will no longer be allowed to practise because they do not pass the regulator's new qualifications in time (a group for whom it is difficult to have much sympathy).

Still, as Standard Life pointed out yesterday, the UK long-term savings market remains attractive, despite the allure of faster growth from developing economies. The combination of an ageing population and declining state assistance for pensions is an open goal for the industry. To score, however, insurers and advisers alike must work out how to take advantage of next year's reforms.