Imagine a world where no commission is paid for the sale of a protection product, and where advisers have to pay to attend Continuous Professional Development seminars organised by life offices. Welcome to the Netherlands.
At the start of 2013, the Netherlands, like the UK, effected a ban on commissions for financial services products. The Netherlands ban, the culmination of a journey that started more than ten years ago, went a good bit further than the UK’s Retail Distribution Review framework, in also prohibiting commissions on protection products.
For the past four years, the UK protection industry has argued that banning commissions for its products would produce a doomsday scenario for sales. The Netherlands, however, has not experienced a crash in protection sales; in fact, Dutch advisers are upbeat about the outcome.
So what really happened? The history of the Dutch and UK financial services industries have much in common. The lightly regulated products of the 1980s and 1990s produced excesses of fund charging and endowment mis-selling. In 2002 the Netherlands had clearly had enough, and introduced its first conduct regulator – the Netherlands Authority for the Financial Markets (AFM) – which brought with it a Treating Customers Fairly-style ethos.
The AFM introduced standardised policy documentation, improved educational standards and required commission disclosures. In addition, public authorities allowed advisers to ask if their clients wanted to pay a fee.
In 2006, in the aftermath of the mis-selling scandal that cost Dutch insurers €5bn, the process gathered even more steam. One of the differences between Dutch and UK markets was that in the 1990s commissions had to be paid over a minimum six-year clawback period, with most insurers using ten-year periods.
In 2008, the Ministry of Finance started changing the payable up-front and trail commission amounts: first to 80:20; then 70:30 and finally to 50:50. This weaned advisers off large up-front payments and gradually forced a change in the adviser cash flow model.
Then, in 2009, the regulator challenged insurers to set a justifiable limit on the commission payable for any sale. For a mortgage and protection sale insurers’ caps were coming in at around €5000.
In 2008 the ombudsman dropped the bombshell of a self-regulated 2.5% investment charge cap and full retrospective repayment of past charges in excess of 2.5% – a clear signal that the public authorities were disappointed with the market continuing to find ways to mask costs from consumers, and a huge hit on insurers.
In 2009, the process of banning any kind of inducement started. Rules are now so severe that insurers cannot even buy an adviser a drink, let alone pay marketing fees for panel positions or provide advisers with discounted best advice software. At the same time, new regulations for transparency and the abolition of bonuses were introduced.
Then, in 2011, the regulator announced its intention to completely ban commissions by the end of 2012. As the ban approached, advisers were mentally ready for the changes, and were increasingly comfortable with talking about people’s lives and their needs as opposed to products.
Ruud de Bruijn, a manager with a large Dutch mortgage chain, notes: “By 2013 we had learnt how to behave and were upbeat about the impact of the ban. This new way of working helps us, as customers no longer see us as an extension of the insurer. They know we are 100% on their side and we no longer feel like salespeople but truly believe ourselves to be advisers.”
The current protection market in the Netherlands is driven by the mortgage market. Home ownership in the country is currently about 60%, and lenders require a life policy to be in place and assigned before they release mortgage funds.
The sales process often takes three to four interviews (one to two working days), while fees (for the mortgage, GI and life sales) are typically in the region of €2500 to €3500.Customers could choose to use hourly rates (often in the range of €100-€150) and for protection-only sales the cost could be as much as €400.
There are now far fewer advice companies in the Netherlands – around 4,000 compared to 11,000 a decade ago – but consolidation means the actual numbers of advisers has remained constant.
With a slowly recovering housing market, 2013 mortgage protection sales did not slump, but non-mortgage sales (which make up only 10% of the market) were around 30% down.
So what are the lessons for the UK? Firstly, the more the Dutch didn’t play the game, the harder the line the regulators took. Secondly, the inducement regime has drawn a clear line between the adviser and the manufacturer, which customers and advisers seem to have bought into. And thirdly, a successful shift takes a long time – ten years in the case of the Dutch.