Buying life assurance savings products or pensions in the future could be bad for your wealth.
In an extraordinary about turn, the Minister of State for Enterprise and Employment, Mr Noel Treacy, who has responsibility for the life assurance industry and consumer affairs, has notified industry representatives that he has dropped provisions for the disclosure of commission from a long awaited Ministerial Order draft amendment to the Sale of Goods and Supply of Services Act 1980.
Such disclosure provisions were included in a Draft Order devised by the previous Minister, Mr Pat Rabbitte, last April, but never enacted.
Instead, the Minister has effectively endorsed the existing insurance industry practice by which policyholders are only shown the effect of set up charges (of which commission is only one part) on the projected surrender value of their investment fund. They will be shown the effect of the charges on the first five years of their investment and then every fifth year thereafter. This information will be given at point of sale, however, and within the cooling off notice which is sent to customers after the sale. The Consumers' Association of Ireland, which has played a critical role in forcing the Department to abandon its original plans to enshrine the Irish Insurance Federation's commission agreement in the 1980 Act (the CAI challenged the legality of the commissions agreement with the Competitions Authority), says that as far as it is concerned, "this is only a draft, one of several that has been floating around in recent years". The association has requested an urgent meeting with the Minister.
The Irish Insurance Federation, which has lobbied against full disclosure of charges on the grounds that it would have resulted in "information overload" of customers, circularised its members with the Minister's notice last week and instructed them to ignore earlier proposals on commission disclosure.
The IIF's view has been that the current practice of showing the customer the monetary effect of charges on the surrender value of their fund was sufficient information with which to determine whether the policy represented good value or not.
There is widespread surprise within the industry at the Minister's decision. Many senior life assurance officials had admitted privately over the past year that at the very least they expected commissions would have to be revealed, and at the very worst, that their own charges would also have to be shown. The latter is often higher than the value of the commission.
Many senior life assurance officials concede privately that the revelations about widespread misselling of endowment mortgages and whole-of-life savings policies up to a few years ago, plus the announcement last March by the Competitions Authority that it intended to rule the IIF commissions agreement illegal, would probably result in a requirement for greater transparency. Some companies were already preparing to change their sales documents and literature to take into account the expected new transparency rules.
The IIF, which insisted to Family Money that "we have no problem with disclosure", nevertheless welcomed the Minister's decision. Mr Treacy, said a spokesman, "obviously shared" the IIF view that it was too difficult to determine exactly what constitutes commission in all companies.
The IIF argued that since some of its members paid salaries to their direct sales staff, rather than commission (and do not pay commission to outside intermediaries such as brokers) it would be very complicated to try and establish what exactly represented the commission element of the total policy charge.
Elements such as the provision of company cars, bonuses and other sorts of remuneration would have to be taken into account to make any commission figure fair, and this would have produced an "information overload" which would only confuse customers, said the IIF spokesman. The Minister "obviously agreed" with this, said the spokesman and decided to maintain the status quo where the effect of the total set-up charge is shown against the customer's illustrated surrender value.
The reaction from life assurance sales agents and senior executives ranges from delight to deep concern about the direction the industry may be taking.
Family Money was told by one company executive that his "front-line troops" - direct sales staff and commission-based brokers who pass on business - "are thrilled that if this order is passed they will not have to reveal what they are earning each time they sell a life policy or a pension".
There was a huge fear, he said, that their incomes would drop if they had to tell potential customers exactly what cut they were taking, especially in the early years of the contract. "All along they thought it was very unfair that all the emphasis had been on their commission", but not on the charges the company was taking.
If this Order goes through and there is no commissions agreement in place to rein in excessive commission payments to sales intermediaries, the implications for the buying public will be very serious, say industry sources. Already, there are rumours that some insurance companies are violating the existing IIF commissions agreement in anticipation that the Competition Authority will finally rule it illegal. (The Authority has already issued a preliminary finding to that effect.)
The IIF spokesman admitted hearing these reports as well, but that there "hasn`t been a shred of evidence to support them". As an organisation, the IIF, he said, is absolutely committed to the terms of the existing commissions agreement and would "condemn any parties found violating it".
In the nine years since the IIF was granted regulatory authority over its members it has never publicly criticised or sanctioned any of them for any breaches of regulations. In Britain, where regulation has been independent of the industry for several years, millions of pounds in fines and/or compensation have been levied against life companies and intermediaries.
