Examination of Witnesses (Questions 540
- 559)
TUESDAY 27 JANUARY 2004
MR SANDY
CROMBIE, MR
JONATHAN BLOOMER,
MR DAVID
PROSSER, MR
RICHARD HARVEY
AND MR
ANDY HASTE
Q540 Mr Cousins: In your case you
are saying that the appointed actuary did exercise a role in flagging
up that all was not well in this particular range of products
and it might be wise to stop selling new ones.
Mr Bloomer: In the way of the
Board operating it was a general discussion that it was something
that we wanted looked at, it is natural for the appointed actuary
to be the person who would look at it in detail and do the calculations
and report back.
Q541 Mr Cousins: Mr Bloomer you do
see my difficulty here, that was a job that the board gave to
the appointed actuary, the appointed actuary is supposed to be
there as a watchdog on behalf of the policy holders and being
proactive.
Mr Bloomer: I do not mean to imply
he was not proactive and an important part of the discussion,
it is just simply the mechanics of how it works.
Q542 Mr Cousins: Who is there to
defend the interests of policy holders?
Mr Bloomer: The whole board of
the operating company has a responsibility to the policy holders
as well as those specifically give to the appointed actuary. We
operated in a way that we are concerned about the way our policy
holders are treated.
Q543 Mr Cousins: Do you all pay renewal
commissions?
Mr Haste: We are closed for new
business.
Q544 Mr Cousins: Those of you who
are open for new business do you all pay renewal commissions?
What is the renewal commission for?
Mr Bloomer: It is usually designed
to encourage the persistency of the product.
Q545 Mr Cousins: It does not imply
any relationship, any duty of care? You look very puzzled at the
idea of duty of care.
Mr Harvey: I think it creates
a balance of interest. We talked earlier about whether there was
an appropriate balance of interest, I think that it is appropriate
that an adviser is first of all paid for the very substantial
effort involved in the front end advice in respect of a policy
but also where there is a policy that continues with a regular
premium process that the right incentive is there to provide for
on-going contact with that client but also to provide the incentive
which we just talked about to balance the scenario to make sure
that products which are appropriate for the long-term persist
for the long-term, it is a balance of those processes.
Q546 Mr Cousins: Do you not think
there needs to be some analysis or proper study in future of the
payment of renewal commission, not just the upfront commission
in order to sell the things but the renewal commission that is
built into the charges that the holder of an endowment mortgage
pays, do you not think there should be some consideration given
as to whether that implies some kind of duty of care to the person
who has the product?
Mr Crombie: The relationship exists
between the independent financial adviser and the customer. The
customer has an adviser, the commission arrangements are disclosed
at sale and the purpose, I believe, of the renewal commission
is to encourage an on-going relationship where the adviser continues
to give his client advice during the currency of his contract.
Q547 Mr Cousins: Exactly. Do you
think the payment of the renewal commission implies a continuing
duty to give advice over that product?
Mr Crombie: A continuing relationship
between the adviser and his client.
Q548 Mr Cousins: Continuing advice
over that product which is generating the renewal commission,
you do not see that, do you?
Mr Crombie: The relationship is
between the adviser and the client. We have no information beyond
the point of sale of what that relationship is and whether it
maintains or not.
Q549 Mr Cousins: You are continuing
to pay the renewal commission and you are taking that money out
of the policy holders' funds in order to pay it.
Mr Crombie: Indeed because it
was disclosed upfront as part of the agreement between the client
and the client's adviser.
Q550 Mr Cousins: You do not feel
that the payment of that renewal commission implies any obligation
to provide continuing advice on the performance of the product
and how it should behave and how the person should respond, that
is not your view, that is purely a private arrangement between
you and the intermediary.
Mr Crombie: We are dealing here
with intermediaries who are regulated. They are a regulated entity,
they have a relationship with a client. We cannot take responsibility
for the relationship of a different regulated entity with their
client.
Q551 Mr Cousins: What happens to
the renewal commission when you have direct sales forces?
Mr Bloomer: They will alter the
sales force for a short period of time, it is not normally a long
period of time.
Q552 Mr Cousins: You do not think
that implies some obligation to the client either?
Mr Bloomer: We have not had a
direct sales force for four years. When it existed we worked with
the company to make sure that the sales force maintained contact
with these customers.
Q553 Mr Cousins: This whole saga
was built up on two tax benefits running parallel. Of course the
effect of the endowment was to keep up the size of the mortgage
so that more mortgage tax relief could be achieved on it, there
was this double tax benefit within the endowment mortgage system,
do you think it is right for governments to give substantial tax
signals that favour particular products?
Mr Harvey: It is not for me to
tell governments how they should manage that process.
Mr Cousins: I am sure you do on a lot
of other topics.
Q554 Chairman: You have told them
on Child Trust Funds.
Mr Harvey: Point well made. The
system that existed in the past had the advantage in effect of
neutralising the tax process, it meant that a customer was not
paying, if you like, a double tax by saving to repay their mortgage
using an endowment type product and therefore made that product
more attractive. It had the advantage, although we may now feel
with hindsight the disadvantage, of allowing that customer to
participate in the broader savings market with a diversified portfolio,
including equities, and of course until the current economic situation
customers did very well from that opportunity.
Q555 Mr Cousins: I am looking to
the future.
Mr Harvey: By it not being there
the product then becomes relatively tax inefficient and is not
one that we would recommend.
Mr Prosser: I think it is right
for government to look at particular ways they believe the economy
would best move and to shift, if you like, the balance of savings
from time to time. Governments have always done that and they
always will do that and I think it is appropriate. The area that
is, I guess, of most concern at the moment is the pensions area
and whether the Government will shift the balance so that lower
paid employees will save rather more towards their pensions when
it is in their interests to do so. I think it is on-going.
Mr Bloomer: From my point of view
I think the complexity of the tax system is one in a whole range
of factors to do with the level of long-term savings. It is still
a very complex arrangement round pensions and the taxing regimes
for other forms of savings or for housing, which in essence for
a lot of people is a form of saving for the long-term, and it
is why we would argue strongly for a level playing field and for
a review of the tax system for the whole of savings to make it
a simpler structure. Some of that is on-going, it is on-going
already with pensions. I think it is the wrong thing, we should
have a complex system that leads to particular products that take
advantage of that as opposed to a much more straightforward system
that is easier for everyone to deal with and understand, easier
for advice, easier for people to see where best to save.
Mr Crombie: Governments seek various
means to encourage people to behave in ways that match long-term
policies, right-to-buy is an approach that one government chose
to select to encourage people to behave in a particular way. In
our business ISA-type incentives, that is no tax charges on ISAs,
is a very deliberate incentive, as is the tax relief on pension
contributions. Governments will choose a variety of means, occasionally
in our industry, by offering tax advantages.
Q556 Mr Cousins: None of you feel
that a tax system which enables financial institutions like yourselves
to design very complex wrappers round tax incentives which can
generate substantial cost and charges for savers is a bad thing?
Mr Bloomer: As I said I would
much prefer a simpler system which makes it much more transparent
and easier for customers to see where they are saving. I explicitly
was not favouring a complex system.
Q557 Chairman: We will be inviting
you back to look at that very point and a point you made as well
Mr Prosser. Mr Prosser, in the press this morning there is talk
about Legal & General in the future and it is suggested that
the writing is on the wall for with-profit policies for you, give
us a quick answer?
Mr Prosser: There are three significant
changes, in parts it is undecided and other parts are under debate
from the FSA at the moment. One is Principles and Practices of
Financial Management, which goes through the creation of transparency
but very detailed transparency of the with-profits fund and product.
The other is the realistic reserving move which Mr Crombie has
commented on which I believe for with-profits is particularly
heavy in its use of capital and the third is Treating Customers
Fairly. With the combination of the three I have some doubts as
to whether there will be sufficient capital being created for
the future in order to continue with this with-profits product.
Yes, as a result of those three pieces of work we would certainly
review whether we would want to continue offering with-profits,
not that it would mean changes in assets because we are low on
reserving. It is something that we would wish to review.
Q558 Chairman: Mr Crombie you said
in your submission that it was the very heart of your approach,
does it still remain that, with-profits?
Mr Crombie: I would very much
hope that with-profits still remains a profitable product, I think
it has served people very well, although in many respects it has
had bad press. When the time is taken to compare it with the alternative
that might have been chosen then it has done its job exceeding
well. I think it would be a great shame if the product was lost
as an opportunity for people to save with but unfortunately at
the moment the trend is against with-profits.
Q559 Chairman: Summing up, Ned Cazalet
an independent analyst who came before the Committee mentioned
that nine out of ten endowment policies would fail and the typical
shortfall was £11,000 and this would be a total bill of £100
billion, is he talking with his head out of the window, not another
part of his anatomy?
Mr Prosser: I do not think that
fits in with the projections we have given to you, Chairman.
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