Paymentshield’s controversial decision to axe renewal commission for brokers who are no longer regulated to sell general insurance (GI) could set a dangerous precedent for other insurance commission payments, a mortgage intermediary has warned this week.
Danny Lovey, proprietor of The Mortgage Practitioner, based in Basildon, says many of the UK’s life insurance providers have clauses in their terms and conditions that would enable them to claw back initial commission paid on an indemnity basis if a broker were to leave the industry, through retirement, for example.
Lovey says Paymentshield’s shift in policy could open the way for other insurers to do the same, severely reducing the income retired brokers would receive.
More worryingly, Lovey says if life insurance companies also followed suit and changed their commission policies for intermediaries, retired brokers could be bankrupted by being forced to pay back indemnity commission on business that remains live. Normally indemnity commission has a two or four-year claw-back clause that means brokers have to repay monies if their client cancels the policy within that period.
Lovey believes those same clauses could be used to invoke claw back from retired brokers, even if the policy is still running. “It only takes an accountant or the managing director of an insurer to take a close look at the terms and conditions and say: ‘We’ll enact that clause and save us some money’,” Lovey explains. “It’s no good saying it won’t happen, because it will. You only have to look at Paymentshield to see companies can change their minds.”
Terms of business
Lovey has forwarded Mortgage Introducer documents from insurers including Legal & General, Norwich Union, Friends Provident and Scottish Equitable among others, detailing their terms of business for intermediaries selling life insurance. All include wording relating to commission and the insurer’s right to demand this back.
Legal & General’s terms state: ‘If the intermediary ceases to trade, any commission paid on indemnity terms which remains unearned at the date of cessation of trade shall be a debt owing to Legal & General and must be reimbursed in full to Legal & General.’
Norwich Union’s terms of business reserve the right to stop paying commission if a broker ceases trading or resigns their authorisation, among other scenarios, which would result in termination of the insurers agreement with the adviser. Under the section on termination, Norwich Union says: ‘Whatever the reason for termination, you will immediately repay all monies owing to us at the date of termination including any unearned indemnity commission that has become due for repayment at such date. In addition, you will continue to remain liable for any future unearned indemnity commission that may become due for repayment.’
Lovey explains: “These terms give insurers the right to claw back indemnity commission they will say is ‘not earned’ because an adviser has, for instance, retired two years into the insurance contract and there is still two years left to run of the initial earning period. If this was ever enforced it could bankrupt retired advisers in some cases with the claw backs.”
Lovey believes current indemnity commission structures are unfair because he says intermediaries do all the work advising clients and setting up the insurance upfront, but because they are paid on an indemnity basis they could see their income clawed back if clients decide to cancel their policy. He feels that the current approach does not recognise or reward the work advisers have to do in the first place, whether the policy remains live after a couple of years or not.
The clause allowing insurers to force intermediaries to pay back commission if they leave the business, even if the actual policy is still live, just compounds the unfairness, Lovey claims. “They can claw back half your commission, even though you did all the work up front,” he says. “If you get a claw back demand when you are retired, where does the money come from to pay it back?”
Highlighting the concerns
Lovey has raised his concerns with the insurers. He continues: “I have, for example, discussed this at length with Legal & General and it advises that my interpretation is correct, but it does not ‘do it in practice’. The problem comes when a provider does; it says it will in all its terms and conditions so there is no reason to not believe that this may be done at some time to the detriment of retired advisers.
“If insurers say they won’t do this in practice then let’s have new terms and conditions relating to commission that we are all happy with. This is a time bomb. We need a campaign on this matter and leadership from our trade bodies.”
In a written response to MI, a Legal & General spokesman said:
“I can confirm Legal & General does actively enforce the clauses you highlighted in our intermediary agency agreement in relation to the claw back of commission payments.
“By signing the agency agreement advisers are contractually due to repay any negative balance commission that may arise if a policy should lapse, be cancelled or be surrendered. And the same process for requesting and chasing any debts is consistently applied if the adviser should go into liquidation, stop being an adviser or retire.
“However, we do take into account the adviser’s circumstances and ability to repay and act accordingly. In the majority of cases, Legal & General will advance commission payments to an adviser on the basis we will receive an expected amount of premium in return. If that level of premium is not received then the unearned proportion of the advanced commission which has not been earned is due to be repaid to Legal & General.”
When asked for clarification as to whether the insurer would continue to pay indemnity commission for live business to an intermediary that had retired, Legal & General said: “Normally, if an intermediary had retired from the industry, we would continue to allow the commission to be paid.”
This statement does not say commission payments on live policies will be stopped if the adviser leaves the business – but neither does it confirm that commission from live business will continue if a broker is no longer Financial Services Authority (FSA) regulated.
Hands are tied
Despite the public anger of many brokers, some of whom are threatening legal action against Paymentshield, it seems there is very little in the way of formal action that brokers can take to seek redress or change the insurer’s mind. The FSA has pointed out commission payments in this respect are not within its remit, although the regulator is taking a closer look at the wider impact of commission payments on the sale of insurance products.
Similarly, the Association of Mortgage Intermediaries (AMI) says its hands are tied. Rob Griffiths, associate director of AMI, explains: “This is a contractual issue between Paymentshield and brokers. We have advised our members we can put them in contact with legal representation, but as AMI is a non-commercial organisation, we can’t get involved in these issues. Brokers should read insurers’ terms and conditions in detail and be happy with what they are agreeing to.”
Griffiths also says the whole topic of commission is currently being looked at by the FSA, although it is not clear whether the specific issue of ongoing commission payments for brokers that have exited the industry will be tackled.
Griffiths hopes the FSA review will address at least some broker concerns. He says: “It is quite clear from the FSA retail distribution review that commission is being addressed, both in GI and mortgages. The FSA is looking at how commission is paid and the impact it has on how products are sold. The FSA seems to be suggesting it will look at whether commission is a driving force for the way that brokers are paid.”
Back in August, MI examined the issue of indemnity commission following the delay of a report by the Association of British Insurers (ABI) that was supposed to offer proposals for how the current commission system could be overhauled. This followed an initial report in February 2005 by an external consultant on behalf of the ABI that called for the abolition of indemnity commission, suggesting large upfront commission payments could sway the advice brokers gave.
In response to the call for abolition, the Association of Independent Financial Advisers (AIFA) said any such move needed to be ‘justified in its own right and not through accusations of consumer detriment’.
Speaking to MI this week, the ABI said its review of commission would now probably be published in the Spring. Spokesperson Jonathan French said the current controversy surrounding Paymentshield, and further concerns raised by Lovey over indemnity commission, showed why the review was still important.
French said: “We have been looking at the IFA sector and the distribution committee will meet early in the new year and potentially publish its review in the Spring of 2007. There may not be any firm recommendations in the report, but it will add to the debate and discussion.”
Talking specifically about Paymentshield and the question over indemnity commission for retired brokers, French said the ABI ‘could not comment on the commercial decisions made by individual companies’. Although he went on to say: “The [external consultant’s] paper made the point there is a lack of clarity regarding commission, both in terms of the adviser and customer, but also the intermediary and the provider. Is it for introduction? Is it for on-going service? We believe there needs to be more clarity in that field.”
French continued: “The ABI is looking at this whole issue and there will be something of substance on this issue in our representation to the FSA’s Distribution Review in quarter two of 2007.”
Standing by its decision
Paymentshield itself is still standing by its decision, saying former brokers that are no longer authorised cannot service the client’s needs when the business is renewed and therefore are not be eligible for renewal commission. Chris Traynor, sales and marketing director at Paymentshield told MI: “Paymentshield’s position on this matter is absolutely clear.”
With regards intermediaries that are considering leaving the industry and are now worried they will lose commission they were banking on during their retirement, Paymentshield points out if brokers sell their businesses the new owner will be able to receive the renewal commission, which in turn will push up the value of the business when it’s sold.
However, other insurers have been quick to capitalise on the situation and the perceived discontent amongst the broker community. MI has seen e-mails from insurers to brokers reassuring them they will be paying commission – at least in terms of GI business – if they leave the business or retire.
In its e-newsletter, Source wrote: ‘Shock, horror! Have you heard about Paymentshield’s decision to stop paying trail commission to intermediaries who are unregulated? Just for the record, we certainly won’t be doing the same. We will still pay trail commission to brokers who are no longer authorised or who have retired from the industry.’
Ben Fish, chief executive officer of Commitments Protection, wrote in an e-mail to brokers: ‘May I reassure our past, present and future agents that Commitments Protection has always undertaken to pay renewal commission while ever [sic] the policy remains in force, and I am taking this opportunity to reconfirm this pledge. We never go back on our promises.”
Although these promises must be taken on face value, it is clear that the issue of commission payment will continue to rumble on, particularly as many mortgage brokers currently active in the industry will probably be looking to retire in the next five years or so.
Hopefully the FSA and ABI will come up with proposals that will bring clarity and certainty. Until then, as the Paymentshield issue makes clear, brokers must always look at the small print when it comes to commission and decide whether they want to take the risk of reduced income when they leave the industry.
