IFA payments get shake-up

The retail distribution review, currently being conducted by the FSA, is set to make drastic changes in the distribution of life insurance, by revolutionizing the way independent financial advisors are paid.

Under the current system, IFAs tend to get a one-off commission payment at the inception of a life policy. This means that they have no financial interest in managing the policy going forward. Indeed, the only time they make money is when a policy is changed, or a new one take out.

The FSA wants to change this, to property policyholders’ interests. The main proposals are:

* A clear category of independent advice with new requirements for independent advisers, not just those advising on packaged products, including the need to give unbiased advice.

* A broad sales category ranging from non- independent advice, to simplified advised and non-advised guided sales processes, to execution-only business. Existing single and multi-tied advice can continue in this category.

* For independent advice with no upfront fee any payment for advice through the customer’s product or investment must be funded directly by a matching deduction made from that product or investment at the same time as that payment. Upfront payments from the provider will no longer be allowed but there is still some consideration being given to whether a strictly controlled form of factoring will be allowed.

* The costs of advice for independent and non-independent advisory services must be clearly disclosed separately to product costs.

* All advisers, whether providing independent or non-independent investment advice, must have a minimum qualification requirement of QCA level 4 (CII diploma in financial planning). A transition period will apply but grandfathering (advising without qualifications) will be banned.

* A board will be created to oversee professional standards.

These changes will clearly have far reaching implications for life distribution, and like, BGL Group, other general insurance intermediaries may well see opportunities. However, while there is no official guidance on whether the RDR will be extended to the general insurance intermediaries at a later date, it is certainly an option. So GI intermediaries should bear in mind that they too may need to overhaul their business practices to meet these stringent new criteria.