Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 540 - 559)



  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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