It has been a protracted, desperate fight for survival but the implementation by the FSA of new rules arising from its Retail Distribution Review has surely delivered a mortal blow to many of the 21,700 individuals and companies offering financial advice to UK consumers. Already buckling under the weight of hugely demanding professional conduct and disclosure requirements, the new regulations this month that prohibit firms taking any form of commission from suppliers means that the only source of revenue for independent financial advisors is now upfront fees payable by their clients. The problem is that most research suggests that high street customers are unwilling to pay for financial services either at all or at least to the extent that advisors require to make ends meet.
Although a chronic history of mis-selling life assurance, pensions and other savings products precipitated this shake-up, the inherent potential for conflict of interest at the root of these scandals is not confined to the investment industry; commercial insurance brokers also represent the policyholder but depend on an income stream provided by the insurer. Unlikely perhaps, but were the FSA to similarly ban commission-based selling of insurance then brokers might have to face up to the same inconvenient truth as financial advisors; that the client does not value their service as much as an insurance company.
Already there are signs that distribution patterns are shifting. As online applications evolve and improve, small enterprises are buying insurance directly without intermediation. In the UK middle market many brokers have flipped over the fence entirely for part of their business; acting not for their client, but rather as agent for and underwriting partner of the insurer. Businesses like Thistle, Oxygen, Aquila, Pioneer and Globe are all owned by Lloyd’s brokers and are quietly developing market share operating in this capacity. The formation of the Managing General Agents Association (MGAA) a little over one year ago was in direct response to the very significant growth in the number of firms, many connected to brokers, operating a delegated underwriting model.
It is at the corporate end of the market, that brokers remain steadfastly customer-facing. Since the 2004 Spitzer inquiries, however, the international broking houses have been more transparent in how they are remunerated; working normally for a fee and where they receive commission often rebating it back to the client. Unfortunately in recent times, whilst the brokers have done a good job at containing expenses, with acquisition targets now drying up, their organic growth has remained pretty sluggish. In these recessionary times, with clients looking to minimise insurance-spend, brokers are under pressure to strengthen their value proposition and correctly charge for it. For Willis, like Aon before them, to look externally and specifically to McKinsey for their new CEO suggests that, unlike the investment industry, market pressure rather than regulation is prompting a transformation in the role and function of the intermediary in our sector.