He approached the society directly and it sent him a proposal form. When he received the cooling-off notice, he saw that the Medical Insurance Agency had been named as his insurance broker and was therefore entitled to commission from Family Assurance.
Dr Herxheimer didn't see why the agency should benefit in this way: 'I think I bought the first bond through them; but I have not used them since. Why should they get commission when I approached the company directly?'
He asked Family Assurance if the commission could be paid to Eiris, the ethical investment research organisation. However, Eiris is not registered under the Financial Services Act, so this was not possible.
Initially, it is very difficult to deal direct with an insurance company, unless you are sold a policy by a member of its sales force or you use a firm that doesn't pay commission. However, once you are on the books, you will be bombarded with special deals and offers and, in many instances, positively encouraged to deal directly with the company. When this happens, as Dr Herxheimer discovered, the commission will go to the financial adviser who made the initial contact, even if he or she hasn't lifted a finger since.
If you object, the insurance company will normally agree to delete the name of the financial adviser from your file. In which case, the only beneficiary is the insurer, which doesn't now pay the commission and pockets the money. The companies are prevented by the Financial Services Act from paying the commission direct to the policy holder.
Dr Herxheimer believes this aspect of the Act works against the public interest and that where no financial intermediary is involved, policy holders should be allowed to have the commission paid to a charity, for example.
Barry Chambers, the marketing director of Family Assurance, defended the practice of granting commission to intermediaries on business that comes direct to the company. 'We find that paying commission to financial advisers is the cheapest way of getting new business,' he said.
'It is wrong to say that the company is the only beneficiary when no commission is paid. Our costings allow for the fact that some people don't want the commission on repeat business to go to a financial adviser. We also give new customers a bonus when they are introduced by a member of their family.'
Dr Herxheimer could have asked Medical Insurance Agency to share the commission with him. But Anthony Bycroft, the managing director, said he would have been refused. 'If it hadn't been for us, I suspect this gentleman would never have known about friendly society bonds. Also, we are a non- profit-making organisation and our profits go to medical research, so nothing has been gained by depriving us of our commission.'
The only other options open to Dr Herxheimer were to find a financial adviser who was prepared to share the commission with him, or to go to a fee- based adviser who would make a small charge for processing the policy and refund the commission.
A list of fee-based advisers is available from Money Management, Greystoke Place, Fetter Lane, London EC4A 1ND. Tel: 071-405 6969.
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