Regulators Finally Crack Down on Insurance Commission Disclosure

Strategic Insights -

Regulators have finally given in to years of pressure from consumer groups and announced that insurance salesmen must disclose their commissions to customers. From January 1 next year, financial advisers will have to reveal how much they stand to make from each policy they sell, providing a clear written statement to investors. This move aims to give investors a better understanding of the products they are buying and the sales process they are involved in.

Key Takeaways:

  • The Securities and Investments Board (SIB) has announced that all financial advisers must disclose their commission to customers from January 1 next year.
  • The commission disclosure will apply to all life insurance and personal pension plans, as well as lump-sum investments, including unit and investment trusts.
  • The average commission for a 25-year endowment policy with a premium of £50 a month is £507 for independent advisers and £578 for tied agents.
  • The commission will have to be disclosed before the client signs for a policy, and this rule will cover all types of investments and insurance products.
  • The proposal aims to give investors clear information about what they are buying and to ensure that investors are aware of the sales process.
  • Industry-wide commission scales were scrapped in December 1989, which led to a dramatic increase in commission paid to advisers.
  • Many cases of mis-selling have been reported, with high levels of commission being held responsible.
  • The Office of Fair Trading concluded in 1992 that greater disclosure was needed to drive commissions down.
  • The Treasury agreed with the SIB's decision and ordered the regulator to change its rules to include commission disclosure.

Statistics:

  • Average commission for a 25-year endowment policy with a premium of £50 a month: £507 for independent advisers and £578 for tied agents.
  • Commission disclosure will apply to all life insurance and personal pension plans.
  • 25-year endowment policy prepaid for £6,000: an independent adviser's commission would be 10.4% (£646), while a tied agent's commission would be 11.4% (£696).
  • The SIB plans to introduce new rules to ensure that investors receive concise information about the products they are being sold.

Sources:

  • The Sunday Times, 1994
  • Securities and Investments Board (SIB)
  • Office of Fair Trading
  • Treasury