Traditional commission models not sustainable says Scottish Life
Thursday, 13 March 2008
Scottish Life, the pensions specialist arm of the Royal London Group, has reiterated the arguments against the sustainability of old-style, traditional commission models. This follows Friends Provident's decision to stop paying initial commission on new group pension schemes, and media speculation that other companies may follow suit.
John Deane, Chief Executive of Royal London's Intermediary Division (which includes Scottish Life), comments:
"Scottish Life pioneered Customer Agreed Remuneration (CAR) with the launch of Financial Advisers' Fee in May 2003. We firmly believe this approach demonstrates the value of transparent remuneration structures in establishing a sustainable pricing model in the market place. Under the Financial Advisers' Fee option, the adviser and client agree at the outset the payment to be made to the adviser for the services they provide. This is charged upfront, rather than by increasing the annual management charge (AMC) over the life of the plan.
"As a result, the AMC is kept as low as possible, improving longer-term value for clients.
"Over 90%* of our new regular premium individual business is written using a fee-based structure (ie a traditional fee or Financial Advisers' Fee) and we believe this is more transparent for customers as well as being more sustainable for advisers and providers. In addition it means that providers can compete on their products' merits rather than on the commission levels they pay.
"We have long argued that old-style commission structures destroy value for the shareholders who provide the capital for provider companies. We were not surprised by the Friends Provident announcement and we do not see that shareholders in provider companies which still maintain this model will accept it for much longer.
"Of course we appreciate that advisers can't change their business models overnight. But there is a groundswell of opinion towards CAR, particularly following the Retail Distribution Review. There are a number of misconceptions surrounding CAR and providers such as Scottish Life need to help IFAs understand how it works in practice. They, in turn, can help their clients understand the value that their advice is adding.
"One misconception that is sometimes voiced is around the VAT treatment of different forms of remuneration. Following discussions with HMRC, Scottish Life is confident that CAR structures which relate to a product purchase, such as Financial Advisers' Fee, are exempt from VAT as they are treated primarily as 'execution of a purchase' even when there is an element of advice involved in the transaction."
- ENDS-
*91% of Scottish Life's individual regular premium new business is currently being written using a fee-based structure, primarily the Financial Advisers' Fee commission option. The remaining 9% of cases use the traditional initial commission basis. Source:Scottish Life figures for 2nd half 2007.
For further information please contact:
Scottish Life
Alasdair Buchanan
Head of Communications
Tel: 0131 456 7133
Polhill Communications
Nicola Pierce
Tel: 020 7655 0530
Editor's Notes:
Scottish Life was founded in 1881 in Edinburgh as a proprietary company, becoming a mutual company in 1968.
On 1 July 2001, Scottish Life demutualised and transferred its business to The Royal London Mutual Insurance Society Limited. Scottish Life is a division of Royal London and is the specialist pensions business within the Group, providing individual and group pensions to the market via intermediaries.
Scottish Life and Royal London's other intermediary businesses are based in Edinburgh where 1,200 staff are employed, with 440 working in other parts of the UK and overseas.
Royal London Group is a specialist financial service provider. Its businesses focus on those sectors of the market which value premium propositions, operating through a number of brands:
- Scottish Life – UK pensions market
- Bright Grey – UK protection market
- Scottish Life International – offshore investment markets
- RLAM – fund management
- RLAS – life and pensions administration
- Fundsdirect / Ascentric – funds supermarket; Wrap Platform
Royal London is the largest mutual life and pensions company in the UK with Group funds under management of £33.1 billion. Group businesses serve around three million customers and employ 2,620 people. (Figures quoted are as at 31 December 2007).