Just Say No: the real cost of indemnity commission

There are plenty of aspects of operating in a regulated environment which don't make much sense, but we bear with them in the hope that it will all come out alright in the end.  IFAs need to come equipped with a baseline level of mindless optimism in order to survive in this business.

One of the least comprehensible elements within the FSA's RDR initiative was the decision to exempt protection products from the ban on commission - and in my concern about this profound inconsistency, my focus is primarily on the persisting nightmare that is indemnified commission.

It is not, after all, as if it ever was a sound financial idea for an intermediary to be paid a huge wadge of upfront commission on the never-never, on the assumption that the client would undoubtedly maintain his or her premiums past some minimum qualifying period, presumably out of nothing but a form of altruism directed at the IFA.

Life is full of surprises.  People's situations can change profoundly in the blink of an eye, not least family loyalties or personal spending priorities.  Straitened financial circumstances will almost inevitably result in cutbacks in spending on financial products, and you can use logic, or appeal to moral imperatives until you're blue in the face - that policy is going to get lapsed.

So, why do intermediaries continue to place business on an indemnified basis?  Do they have a special breed of client who will grin and bear it throughout a period of financial austerity, persisting with those unaffordable premiums, just to protect his IFA?  Of course not.  That represents the kind of loyalty that will usually result in someone requiring therapy.

And I'm beginning to think that the rest of us need therapy too, for the conspiracy which allows this voluntary shooting of oneself in the foot to continue.  The financial model makes no sense at all.  It doesn't build longer-term value.  It ignores the realities of life.  It sets the IFA up for painful book-balancing exercises later on - and the additional work it causes for networks like ValidPath is simply monumental.

This week, my dedicated, saintly, patient accounting team have accumulated a frankly unbelievable amount of non-billable time attempting to resolve the accounting mess created by one insurer, in the wake of such a policy lapsing.  The people at the other end of the 'phone (in Swindon!) have, apparently, absolutely no grasp of accounting principles.  This particular insurer usually sends the commission data through via an EDI feed and by hardcopy statement - but sometimes, apparently on a whim, omits one or the other.  That makes unravelling the mess hard enough, but when the insurer's own systems are apparently unable to calculate and repay the correct balances, the resulting telephone conversations give one a sense of sinking slowly through a large vat of cold porridge.

So take my advice:  if you are offered indemnified commissions, please just say 'No'.  You don't need to run screaming from the room (although, based on recent experience, that would seem quite a moderate response).  You just need to recognise that it doesn't do anyone much good.