The UK’s life insurance industry could
“self-destruct in the next five years” if it does not back the core
aim of the Financial Services Authority’s (FSA) Retail Distribution
Review (RDR) of putting the consumer first, warns Mike Kellard, CEO
of French insurer Axa’s UK unit, Axa & Winterthur Wealth
Management. Kellard was delivering the keynote speech at a
conference in late January, Rethinking Life Insurance 2008 –
Generating and Preserving Value.

The FSA published an RDR discussion paper in June 2007 in which
it called on insurance industry players to comment on its proposals
for sweeping changes to the structure of retail financial product
distribution. The key objectives of proposed changes are, as set
out by the FSA, to:

improve standards of professionalism;

find more cost-effective ways of making advice available to a
wider range of consumers; and

  • improve consumer understanding of what they are getting for
    their money.

The FSA’s discussion paper closed to comment on 31 December 2007
following receipt of more than 900 responses. An interim statement
on the comments will be published in April 2008 and a detailed
statement in October 2008.

The most controversial aspects of the FSA’s proposals revolve
around the use of commission versus fees to remunerate advisers and
creation of categories of advisers offering either primary advice
or professional financial planning and advisory services.

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The FSA explained that primary advice would entail providing less
costly advice on more straightforward needs using simple products.
The primary advice service would not consider a consumer’s needs in
great depth and would require advisers with limited qualifications.
It could, however, be aimed at a wider consumer audience and offer
a wider range of products than the existing basic advice

Professional financial planning and advisory services would target
consumers who need the full range of advice and require highly
qualified advisers. This category of adviser would be divided into
two types. The first could agree their remuneration directly with
the customer – consumer agreed remuneration (CAR) – and not with
the product provider and would be permitted by the FSA to call
themselves independent.

Alternatively, the FSA proposes that advisers in the professional
financial planning and advisory services category could still be
remunerated via commission but would not be able to call themselves
independent. In this situation, the FSA said, it “would then seek
to address the risks of lower professional standards and potential
conflicts of interest through increased regulatory requirements”.
This, stressed the FSA, would provide “regulatory incentives to all
firms to operate with higher standards”.

Alluding to the FSA’s seeming intention to use regulatory pressure
to promote CAR, Kellard asked in his speech: “Could the RDR make
commission impossible?”

Kellard urged the FSA not to make the RDR a debate about fees
versus commission but one around providing clarity and building
consumer trust. He added that proposals made to the FSA that would
offer transparent commission should be employed, generally in the
middle and upper ends of the market and as an option at the lower

However, Kellard added that CAR is arguably the most popular of all
the proposed models and provides a way of improving transparency
and building consumer trust. He referred to a survey published by
the Association of British Insurers in early January that found
more than fourth-fifths of consumers agreed the concept of CAR was
easy to understand and two-fifths believed using CAR would increase
their trust in the industry. These findings contradicted some
adviser views, he noted.

On the FSA’s proposals on advisers, Kellard believes there are too
many categories. Instead, he explained, there should be only two
main categories: qualified advisers, including general and
professional, and unqualified advisers such as those who are in

Concluding his speech, Kellard said the RDR must ultimately be
about changing the consumers’ view of the industry for the better,
and building an open and transparent relationship with them for the
long term. “The RDR’s prime aim must be to simply close the gap in
trust and improve the business model so consumers understand and
value what they are getting,” said Kellard.