More must be done to tackle job-hopping protection advisers who cancel and rebroke policies – Graves

Much debate was had about commission pricing structures ahead of the Financial Conduct Authority’s (FCA’s) Pure Protection Market Study interim report. 

However, I believe one of the biggest risks that firms face is chasing income by hiring advisers ‘with their own clients’ without sound due diligence. 

If a firm doesn’t fully understand the long-term risk a rogue protection adviser can pose to the business, then they won’t put adequate measures in place to protect themselves from future harm. 

By ‘measures’, I mean managing commission structures alongside contractual clauses preventing the churning of cases when an adviser moves firms. 

While most commentary by industry experts appears to focus on the commission structures in the market – i.e., ‘loaded premiums’ – the real problem is not being addressed or even recognised. 

Having a business model that solely focuses on outdoing your competitors on commission payments is a race to the bottom. 

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The clawback burden 

The real issue is understanding how clawbacks roll up over four years and the impact that has on the way an adviser earns (and owes) money. 

Firms – and networks, for that matter – just don’t seem to realise that by not withholding some of their new business income and placing it in a clawback pot from day one, they run the risk of advisers leaving, starting again elsewhere, churning their client base and leaving the firm with their clawback liability. 

How are we tackling the brokers who build a career out of job hopping and churning business? 

When advisers move firms, they basically have a clean slate, starting again in another firm with no old lapses to worry about. They earn 100% of the new business commission, over four years, in their new firm. Whereas the old firm needs to earn the equivalent of 120% of the original first-year earnings to cover four years of indemnity commission exposure. 

The providers are paying out a ‘commission loan’ based on the understanding that the policy will still be in force in four years’ time. 

 

A blemish on the protection sector 

Advisers moving companies and churning policies are, in my view, the biggest blight on our industry.

This isn’t to say we don’t have exceptional, gifted advisers with a strong moral compass in our industry. However, rogue advisers have the power to bring down an unsuspecting firm by causing untold damage. Less scrupulous advisers move agencies and firms for no other reason than to earn the commission all over again elsewhere. 

Firms appear to be turning a blind eye to this practice just to increase their own profitability. If business starts being written at high levels overnight, then it basically is too good to be true. What’s more, it’s naïve to assume the adviser will not do the same to them three years down the line as they did with their previous firm.

Are firms too embarrassed to admit they’ve been had? I don’t know. What I do know is that while self-employed advisers are not held accountable for their actions, nothing will change.

 

Nipping bad practices in the bud 

Let’s call this bad practice out and focus on supporting the majority of advisers who are a credit to our industry, while removing any route to market for the rogues among us. Let’s champion the idea of an industry standard contract that every self-employed adviser must adhere to, which is enforceable within FCA guidelines. 

No adviser should be able to benefit financially from bouncing from one firm to another just to churn policies. Until providers are much more transparent about the sharing of advisers’ business quality data and keep track of individual lapse rates, rather than presenting lapses at firm level, this practice will continue. 

What’s being done to track down stolen databases that end up in call centres? The practice of rebroking kills the net income of the firms where the policies were originally sold. 

The evidence is all there, but nothing will change until providers find a way to identify and stop accepting churned business from stolen databases. If firms and networks stop chasing that ‘quick fix’ cash injection, then there literally is nowhere for rogue advisers to hide. The FCA, too, has a part to play and must surely see that individual registration of protection advisers is the only way forward. 

 

A task for firms 

I understand, from off-the-record conversations, that it’s somewhat easier for providers to manage the possibility of clawback and churn from poor business practices ‘at some point in the future’ than it is to get investment into better management information (MI) and monitoring adviser behaviour. 

At Auxilium, we do our best to restrict the practice of ‘burn and churn’ by offering to vet advisers before a firm employs them. We also advise member firms not to apply for agency numbers for advisers who don’t meet our due diligence checks.

However, there is only so much we can do if a provider has an automatic registration process or is willing to offer agencies regardless of feedback. Firms who don’t complete proper due diligence when hiring should be held to account too. Turning a blind eye to gaps in CVs or the supply of a recent reference just because you can see pound signs sitting in front of you makes you culpable if that adviser churns business. And let’s not even talk about what impact churning purely for commission has on clients. Is it really in their best interests to cancel that policy and write the same thing with another provider? 

So, my advice is to stop focusing on the different commission payment structures in the market and get a grip of the serial offenders, those advisers that bounce around the industry, avoiding paying back the ‘loaned’ commission and who are leaving their old firms to pick up the tab.

So much time is spent on working out a firm’s lapse rate but how much time is spent on looking for ways to weed out the rogues and prevent them from setting up camp elsewhere? 

I doubt any firm, with loyal advisers, has an organic lapse rate of higher than 5%. 

If providers want to improve the quality of their book they need to be more rigorous in checking the employment history of advisers. And firms need to be held to account if they don’t give references to potential new employers on a timely basis. I might even go as far as to say that if they don’t disclose high lapses and poor performance, they should be responsible for compensating the hiring firm. 

Any adviser leaving a firm with a high individual lapse rate should only be able to earn commission on a non-indemnity basis. And to finish, dare I say that there should be a regulatory requirement to expose rogues? That would solve the problem overnight.