The death of indemnity commission

We've just been putting the finishing touches to the latest version of our Best Practice Platform, the practical digest on 'principles-based advice'.  In this version, (1.3d), I have included a new section anticipating the impact of the banking crisis on product-providers, and the implications for the commission system.

Boy, was I prophetic!  And this without recourse to mind-altering drugs.

Over the last week or so, we have seen a rapid escalation in clawback activity being implemented in a significantly more draconian manner than we have seen hitherto.  Our admin and accounting staff have spent hours on the 'phone, attempting to unravel the not inconsiderable messes created when some big-name Scottish insurers trade indemnified commission clawbacks for one Appointed Representative firm against the credits for another - and without warning us what they are up to!  Our staff have developed major forensic accounting skills as they struggle to identify what on earth these companies are up to - because every 'phone call we make by way of enquiry results in a completely different range of answers.

What does all this mean in practice?  In the short-term, it means a much more involved and proactive approach by our Network in attempting to resolve these kinds of issues before they become a problem to our Members.  In the longer-term, however, the message is that intermediary firms need to think very carefully before choosing to take indemnified commissions on regular premium contracts.  We know that this choice is, very often, driving the selection of product-provider - but the reality is that those very companies which are paying up-front commissions have no systems in place to enable them to treat such intermediaries fairly or responsibly.  I draw the following conclusions:

• if you are choosing to write (pensions) business on indemnified terms, the likelihood is that you are storing future problems up for your business.  If the client even misses one premium, there will be a rapid but undocumented response.
• if you are choosing to set this kind of business up on indemnified terms, make sure that your firm allocates significantly more to reserves to cover future clawbacks.
• indemnified commissions substantially increase risk to your business model - the future has to lie in a single-premium or non-indemnified commission model, if we are to retain these sources of revenues.
• because these insurers effectively 'rape and pillage' commission accounts, by sourcing repayments of clawbacks from the credit balances of other Appointed Representatives, we as a Network have to be much more proactive in reclaiming sums that are owed.
• because these insurers do not give any kind of advance notice of their opportunistic reclaim activity, very often the first we'll know about it is when somebody complains about not having been paid.  When the AR firm queries this with the insurer in question, very often a misleading response is given, which suggests that somehow the Network is to blame.

And we're not, folks!  Really.