Self-regulation or strangulation?
Wednesday 20 April 1994
The life insurance and pensions industry is caught in a bind. On one hand it pays by results, through commission, accounting for up to 100 per cent of income. On the other, it faces tough regulation by authorities that the industry itself caused to be set up in the 1987 Financial Services Act, flushed with the notion of self-regulation.
Many leaders of the sector now admit that if the nightmare proportions of today's self-regulatory machinery had been foreseen, the law might have followed a very different course.
Recently, thousands of sales staff in the sector have been returned to barracks for further compulsory training. 'Training will cost us sales this year,' one chief executive says.
The suggestion that many low-income pension policy-holders have been given inappropriate advice in contracting out of employer schemes has caused more angst. Some life and pensions offices are making large provisions for compensation. And many have already been fined for transgressions by their sales people.
Many readers will welcome this discomfort, if it means that their pensions are more likely to be secure and appropriate to their needs. They may well support the Office of Fair Trading's view that levels of commission on life and pensions products are 'fundamentally unhealthy'. How, you may ask, can sales people provide truly objective advice when their very livelihood depends on making a sale - almost any sale?
During the darker days of the recession, many on commission earned insufficient income to meet their mortgage payments, let alone achieve any recognisable quality of life. In the headier days of the 1980s, many of the same people had had money to burn and self-image to indulge.
Against this roller-coaster of personal fortunes, they now face the noose of self-regulation. A sale may be made only on its objective merits and after due process. Commission, too, must be disclosed at the point of sale.
Not everyone, however, sees this regulation in a wholly negative light. Protecting the public from itself, while seemingly denying a cardinal tenet of market forces, makes sense to some.
The fine print of many a policy document would challenge members of Mensa, let alone mere mortals. Even though the UK is under-insured and adequate state pension provision may scarcely outlive the millennium, the decisions implicit in taking out these policies have far-reaching effects.
It makes sense for the industry to promote, and practise, financial rectitude. The core element is trust. Policies are sold in anticipation of performance. The assumptions made are, understandably, presented in a positive light. History has generally confirmed that performance has matched, even exceeded, the basis of assumption. Nevertheless, the regulatory authorities demand that these assumptions represent a spread of risk.
This is scarcely objectionable. First, it warns the prospective policy-holder that performance goes down as well as up. Second, it puts the brake on any untoward optimism in sales material. Third, it creates something of a level playing-field. Customers need to be able to make intelligent choices, comparing the achieved performance of the individual insurers, not their vaunted claims.
However, there remains the key question of how far salesforces can be left to their own devices. As several thousand of them have been suspended from active duty pending further training, it might seem that the case for regulation of their sales behaviour is proven.
Whether the regulatory system should be self-managed or statutory is the latest battleground.
The debate on this point will run and run, but what is undeniable is that the need for regulation is a direct product of the way the sector rewards and trains its sales people. Commission will have to go, or be relegated to a modest top-up reward. To do anything else is to ensure closer regulation.
Many training systems make use of distance-learning materials. But distance-learning requires self-motivation. Anyone who has tried to learn a language this way knows that the pain barrier is reached after only a few 'lessons'. Given the tiny earnings of many trainees, motivation for learning is, unsurprisingly, elusive.
The problems of training, commission and regulation - let alone the impending crisis in state provision of pensions - demands reassessment. Otherwise, the sector will remain in strategic crisis - a situation incompatible with the UK's aim to stay at the forefront of global financial systems.
The author is marketing director at Sundridge Park Management Centre.
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