Technological advances, a rise in online insurance packages and a consumer society confident enough to by-pass the middle man have left the ordinary broker in a precarious position. Simon Burgess reports
In December last year, consumer group Which? lambasted the FSA for failing to protect consumers properly. Its criticisms were timed to coincide with the FSA's fifth anniversary and yet again voiced concerns over the standards of financial advice being offered to customers.
Which? believes the FSA has not been robust enough in tackling detriment or challenging the industry. It wants the regulator to be more consumer focused in its decision making, a more effective enforcer, more accountable for its actions and more transparent in its approach and work.
Certainly the three payment protection insurance (PPI) providers who were recently 'named and shamed' and collectively fined over £740,000 for failing to treat customers fairly and breaches regarding cold calling will disagree that the FSA is 'ineffective'.
However, there does appear to be a 'malaise' among consumer groups and the public when it comes to financial services. Times are changing and those needing insurance no longer head straight for an intermediary.
The broker v direct argument has always been that the level of personal service and advice is better from an intermediary than a direct writer, but given the increasing criticisms from consumer groups and the FSA's recent finings, are brokers really best?
There's general mistrust and suspicion of those working in this sector, and this was not helped when Which? published its September 2006 mystery shopping findings and reported that out of 57 financial advisors, less than a third reached their expected benchmark for good advice.
While those in the general insurance market will counter that the financial advice in question concerned saving for retirement and income protection so has 'nothing to do with them', I advise that is has everything to do with you. Those giving advice within a financial services context are being tarred with the same brush making the mystery shopping subject matter irrelevant.
Consumers are constantly told to shop around, and the media and internet have all contributed to greater education and awareness. Only last year the ABI called for measures to help people understand more about the products on sale and choices available to them. Although this was within the context of PPI sales, no one can deny this message applies to all areas of insurance.
It's not just direct writers who are exponents of the non-advised route. Leading insurers will be the first to admit that they positively encourage consumers to shop around in areas that have traditionally been a broker's stronghold. Look at the number of insurers who in recent years have unveiled 'packages' to encourage those who require commercial cover to 'deal direct'. Insurers will advocate that all distribution channels have a place in our market, and they're right. But it doesn't take away the fact that they too are cutting out that 'middleman' and reducing the cash going into the brokers coffers.
Premiums are cheaper direct and if this means general insurance is more accessible and affordable to a wider audience then shouldn't this be applauded?
I concede that in more complex and niche areas of insurance, brokers are crucial, but in other sectors, the internet is the way forward.
In September last year, the group chief executive of Aviva, Richard Harvey, discussed how he felt the shape of business was changing. He believes advancing technology means that fewer people and property are needed and outlines how well-informed customers feel confident about self-service shopping and increasingly go online. My sentiments exactly.
The principle of advice and service being far more important than price has been debated many times.
However, when an internet provider is including 24/7 claims phone lines, legal, tax and risk advice helplines, legal protection websites and employment manuals within its standard commercial cover, as well as substantial discounts – there's no argument, the writing's on the wall for the broker.
And this doesn't just apply to the commercial sector. It's widely recognised that consumers benefit from saving money by buying a range of non-advisory products via the internet at considerable discounts, with access to a wealth of 'advisers' should they need to do so.
Brokers cannot compete with the 'online packages' and let's not forget they are limited in what they can recommend due to the fact there's a maximum amount clients can afford to pay in premiums.
Consumers who sidestep the advisory process can often afford a significantly higher sum assured or maybe even stretch to an additional policy. Who in our industry could criticise that?
There are some players within the payment protection sector who are proposing to run a 'no advice, no protection' campaign. They're calling for all non-advisory income protection sales to include a warning to consumers advising they have no recourse to the Financial Ombudsman Service.
Their rationale is that non-advisory players do not have to fund the considerable costs of PI or maintain training and competency standards. This is particularly galling from their perspective given they believe the majority of customers do not understand the difference between advisory and non-advisory sales.
If non-advisory providers were required to carry a 'health warning', would it not also be reasonable for those undertaking advised sales to be required to spell out that it can be possible to obtain more affordable prices elsewhere?
Those with concerns that consumers don't understand the difference between advisory and non-advisory sales should equally have concerns for consumers who rely on their advice. They could be missing out on the opportunity to obtain a significantly higher degree of cover for the same premium via the internet.
Harvey says 'online' impacts how intermediaries communicate. I firmly believe that brokers are being squeezed out in an increasing number of sectors in the commercial as well as personal markets.
Technology is enabling providers to seize greater shares, so brokers must be more chameleon-like in their approach and adapt their business accordingly if they are to survive.
The internet will continue to be the way forward for insurers and consumers, so I'm hoping it's only a coincidence that in the Collins English Dictionary the definition of broker is preceded by broke (penniless, ruined). IT
Simon Burgess is managing director of British Insurance