Bad apples still give insurance giants a pain: Regulation has failed to solve the problem of rogue life salesmen, reports Paul Durman

WHY DO you need to buy a life insurance policy? To ensure financial security for your family if the worst was to happen. Simple.

Now consider why a life insurance salesman needs to sell you a life insurance policy. To earn his wage. Just as simple. But possibly totally at odds with your needs.

This goes some way to explaining why Scottish Widows and Norwich Union, two of Britain's biggest and best life insurance companies, have both fallen foul of the industry's regulators. Their crime: failing to control properly the firms of salesmen (and saleswomen) who sell their policies.

The miscreants at Scottish Widows and Norwich Union are tied agents, salesmen restricted to selling the products of one insurer. Joining them in the life insurance sin-bin are a host of independent financial advisers (IFAs) - brokers who are supposedly able to recommend their clients the best product on the market. Every week Fimbra, their regulator, suspends another handful of its IFA members who have broken the rules. In four years it has cancelled the membership of 762 IFAs; another 57 firms are suspended pending further action.

Insurance advisers profess a desire to be regarded as a profession. But they are whistling in the wind when so many of their number find it impossible to deal competently and honestly with their clients. Why can't these people behave? And why is it seemingly so difficult for the regulators and the life companies to eliminate the bad apples?

Jean Eaglesham, head of money policy at the Consumers' Association, says the biggest problem is not so much dishonest salesmen as poor standards. 'The number who are breaching the rules, who are giving slightly dodgy advice but not appalling advice, is far too widespread,' she says.

Taking out life insurance, a pension or a savings plan is quite unlike buying a kettle, a camera or a car. You are not buying something with a price tag where you can see what it does. An insurance product is all on paper, its workings often highly confusing, with little information that will allow the layman to make a ready comparison with other similar products. There is an unusual degree of reliance on the word of the salesman.

Ron Calver, Norwich Union's general manager (operations), says that however much training and support life companies provide, they must ultimately rely on their salesmen's integrity to deal correctly with their clients.

The regulators have tried to deal with this problem by requiring salesmen to complete what has become known as a fact-find - a record of the client's financial circumstances from which it should be possible to justify the policy sold.

This is where Scottish Widows hit problems. Of 27,000 contracts sold by its tied agents, more than 20,000 were not accompanied by properly completed fact-finds. In other words, the company could not assure itself that 20,000 of its customers were properly advised.

But there is another problem. Nearly all life insurance salesmen are paid by commission, raising possible conflicts of interest between the salesman and client. And although some of the worst biases between different kinds of contract have been eliminated, a salesman will always make more money selling you some product than no product.

The life insurance industry attracts its recruits with the promise of an opportunity to earn a great deal of money. A handful of the best make hundreds of thousands of pounds a year. But the vast majority do not and the average salesman earns only about pounds 15,000 a year. Salesmen have to live, and the unscrupulous may be tempted to cut corners to meet their sales targets - particularly in a recession, when business is in any case harder to find.

'Any businessman whose business is deteriorating into bankruptcy is going to be seriously tempted to do the wrong things,' Mr Calver says.

An often-discussed cure is a move towards fee-based advice. But progress is minimal - if only, to quote the industry's favourite maxim, because 'insurance is sold, not bought'. Few people will take the initiative to arrange life insurance or a pension as they would search out a new stereo. In any case, savers show a great reluctance to pay perhaps pounds 100 an hour for advice they are used to receiving 'free'.

The life offices are tentatively considering ways of moving away from paying substantial initial commissions. This would encourage salesmen to develop a continuing relationship with their clients as well as improving the poor early surrender values for which the industry has been heavily criticised. However, life companies are reluctant to introduce the new structures on their main savings and pensions products for fear that the IFAs and tied agents who sell them would simply switch to other companies paying higher front-end commissions.

Some suggest that Norwich Union and Scottish Widows - both of which traditionally dealt only through IFAs - ran into problems with tied agents because of their inexperience and their failure to appreciate the amount of supervision necessary. Legal & General, in contrast, whose 1,000 tied agents far outnumber the total of the other two offices, seems to have avoided serious trouble with its regulator.

But long experience of running its own sales force did not prevent Cannon Lincoln, a US-owned life company, from being fined pounds 50,000 for failing to stop its salesmen 'churning' clients - advising them to surrender an existing policy and take out a new one.

Many tied agents are former IFAs who were persuaded to go tied because they did not do enough business to justify seeking authorisation as an independent broker, or because they were keen to avoid the hassle this entailed yet wanted to retain a degree of autonomy. 'Some appointed reps were being left with the impression that life would be much easier,' Mr Calver says.

Chris Hatry, sales director of Legal & General, says tied agents need a lot of training and support. 'It's not economic to provide that to firms who are only providing a very small amount of business.'

As life offices have realised this, they have shed many of their less productive and poorer quality agents. Norwich Union has cut the number of tied agents it deals with from a peak of 350 to 130 firms and Scottish Widows has reduced its numbers from 180 to 140. Others have followed suit.

Mr Hatry insists that the level of complaints must be measured against the sheer size of the industry, with premium income of nearly pounds 40bn last year. 'The overwhelming majority of people get very good advice from their insurance salesman, be it IFA, tied agent or direct salesman,' he says. 'We feel we are getting an unfair press. There are people retiring in dignity who would not have if an insurance salesman had not called.'

Mr Hatry contends that investor protection regulations are still relatively new. And there is a danger of regarding regulatory success in catching the incompetent as a sign of failure. But it could be argued that if the system worked these miscreants would never have been selling life insurance in the first place.

The regulators argue that their elimination of the problem firms is indicative of steadily improving standards. This process will continue when new training and competence regulations are introduced next year.

It is admittedly hard to believe that an investment fraud on the scale of Barlow Clowes could occur under today's system of investor protection. Then again, a year ago it would have been thought impossible to carry out a pounds 500m pensions fraud.

Mr Hatry says: 'The quality of advice has improved. I think there's a pretty good chance that in three, four or five years' time, life insurance sales people will be much more repected and much less treated with suspicion than at the moment.'

In recent months, Fimbra has seen a rapid rise in the number of registered individuals on its books, up several hundred to 21,800. Many of these are coming from the tied sector. It must be hoped that the poor quality advisers are not simply moving from one side of the industry to the other.

(Photograph omitted)