Life salesmen to reveal commission: SIB publishes draft rules to end eight-year battle with insurance industry over full disclosure to customers

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The Independent Online
The Securities and Investments Board, the City's senior financial regulator, yesterday published draft rules that will force life insurance salesmen to reveal how much money they receive for arranging life and pension policies.

Before customers commit themselves by signing a proposal form, salesmen will automatically have to give them a written statement setting out how much they will earn.

The SIB proposals herald the end of a debate that has dragged on for eight years. The life insurance industry has fiercely resisted automatic commission disclosure, fearing many customers would be put off if they saw the extent of payments made to salesmen.

The new rules will apply to independent financial advisers and to sales representatives tied to one company, thus including the fast- growing life insurance arms of the leading banks.

Investors will also be given better information about the penalties they suffer through cancelling savings contracts before they mature. Life offices will have to illustrate the policy returns using their own charges, rather than the industry norm that has been compulsory.

Commission often swallows up most of the first year's premiums paid into a typical 25-year mortgage endowment contract.

A SIB task force drew up the draft rules at the behest of the Treasury. The Office of Fair Trading found that SIB's earlier proposals hindered competition to the detriment of consumers. The new requirements will be introduced in July but will not become compulsory until next January.

The SIB wants tied sales people to use a form of disclosure similar to that required of independent advisers - despite the very different nature of remuneration in the two sectors.

Independent advisers fear that tied firms, and particularly members of large organisations such as the banks, will be able to understate their earnings by manipulating their remuneration structure.

Since independent advisers are paid solely by commission, it is simple to require them to disclose payment. But the remuneration of tied sales people is much more complex. Besides commission, they might receive a salary and bonuses, benefits such as a company car, and support services that might include office accommodation, computer equipment and business planning advice.

The SIB wants life insurers to calculate the total value of the payments, benefits and services received by a salesman in connection with a policy sale. It suggested that a tied firm could then tell prospective clients the selling costs.

The SIB task force has devised new 'key features' documents, intended to give prospective investors a clear, easy-to-understand statement of what they ought to know about investment risks, early surrender penalties and other matters. Two versions are being tested to see which is most easily understood by the public.

Andrew Large, the SIB chairman, said: 'By the end of the year, we should have in place the three necessary ingredients to bring about an improvement in selling standards in the retail area: a new disclosure regime so that investors are in the best position to protect themselves; competence and training provisions, to ensure that firms and their sales forces are actually able to deliver advice to a high standard; and a new retail regulator, the PIA (Personal Investment Authority).'

Jean Eaglesham, head of money policy at the Consumers Association, said: 'We are generally very pleased. We think that the new regime should be effective and significantly help consumers appreciate the costs and risks of the products, to counteract the sales pitch.'

Garry Heath, of the financial advisers' trade body, Nfifa, also welcomed the plans, which he said would finally prove that independents gave cheaper advice than all other sales channels.

But he added: 'Commissions are only a small part of the information a consumer needs. Most importantly, he needs to know what a policy's overall charges are. Only an independent adviser can give him this kind of information.'

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