Simon Burgess says the next generation of insurance buyers will be financially literate, so brokers need to achieve greater professionalism to survive
If the government is successful in breeding a new generation of financially literate consumers through its new schooling initiative, then we as an industry are in trouble. Not least because some will be leaving school with more ideas about how products work and are priced than some so-called industry intermediaries.
Why would these people with their new-found confidence in how financial products work even consider approaching a broker at all? They will ask: “What benefits do brokers bring?”
This is worrying, given a recent Biba survey has already revealed a generation gap where the buying habits of those aged 25 and over are in stark contrast to younger customers, showing more concern about price and purchasing via the internet.
The concern is understandable from a Biba and broker perspective: how can the broker survive if the next generation of insurance buyers ignores brokers completely and buys only online?
And for how much longer will they suffer under the misapprehension that they are being advised for free? The Pandora’s box that is commission will be well and truly blown open. It’s time to come clean about fees and start delivering a professional service to customers.
It is something the FSA has been looking at as part of its Retail Distribution Review. It is a controversial debate and one that has split the industry.
The ABI has welcomed the FSA’s proposals. It wants to see a reduction in up front commission and the introduction of customer agreed remuneration.
However, the investment side of the industry is taking an opposing stance. The Investment Management Association and the Association of Independent Financial Advisers are concerned about the different categories of advisers being proposed and whether independent advice can be defined solely by the method of remuneration.
This is a redundant debate for the insurance industry as the vast majority of brokers are paid on a commission basis. But the FSA’s thinking in this area also holds great ramifications for how the consumer perceives brokers and how they are remunerated.
The regulator’s aim is to have a retail market that is characterised by capable and confident consumers that can access clear, simple and affordable consumer information from soundly managed and properly capitalised Treating Customers Fairly (TCF) focused firms abiding by the tenets of principles-based regulation.
The regulator’s commitment to its task should not be in doubt as the most recent figures confirm. TCF breaches now feature in 40% of all fines imposed by the FSA, up from just 11% of fines in the previous year, according to City law firm Reynolds Porter Chamberlain.
Overall, the number of financial penalty notices handed out by the FSA has risen by 58% to 30 during the last year from 19 cases in the previous year.
Where advice is being given, the FSA proposal suggests the future might focus more strongly on the qualifications and the professionalism of advisers.
One way they might seek to retain their advantage is to ensure that their knowledge and skill levels remain such that consumers will continue to be willing to buy access to their advice. With consumers becoming more savvy, maintaining the knowledge gap demands that the intermediary be ever more knowledgeable and delivers its clients a highly professional service.
Raising professional standards will boost consumer confidence in the insurance industry and that will ultimately encourage more people to seek advice.
The CII, as the professional body for the industry, should be screaming from the rooftops about the need for greater professionalism through improving knowledge, continued professional development and encouraging all brokers to take qualifications.
It is encouraging to see Stuart Alexander, Layton Blackham and Smart & Cook successfully achieving the new CII corporate chartered status for their individual firms.
Corporate chartered status is of major significance. It will reinforce the importance of professionalism in a fast-moving and competitive market, and will also help place broking firms on a par with other professional practices, such as accountants and solicitors.
But it is important that the award of chartered status is properly policed. That means confirming that continuing professional development requirements are being met and that the code of ethics and conduct is being adhered to.
Disciplinary procedure does exist and the CII has the right to remove chartered status from any firm found to be in breach of these regulations. It will be interesting to see if it resorts to this sanction for those firms that fail to adhere to the standards required.
Insurance broking is entering a new era of professionalism.
However, the attitude of Biba has been disappointing. It has rejected calls for greater transparency by disclosing commission details to customers, arguing that this was a backwards step for principles based regulation.
Why? Surely one of the abiding principles of business is that the buyer knows how much they are paying for a service and to whom the money goes?
Biba says it advises members to have appropriate systems in place to ensure they can supply remuneration details when asked by a customer. But it admits it can do nothing to force members to adopt these measures to aid transparency.
The FSA’s Principles for Business and the Insurance Conduct of Business sourcebook requires intermediaries to disclose remuneration when requested by the client to do so. Why don’t we simply disclose those details everytime as a matter of course? Why would anyone object to the intermediary receiving a commission payment if he or she were receiving a professional service?
Firms that recognise the benefits of professionalism will be the most profitable as we move into a new era.