Would you rather spend your money going on holiday or buying a retail savings product? The natural tendency for consumers to opt for the former choice leads practitioners to argue that life products are sold, not bought. And selling costs money - which often amounts to paying someone to have a face-to-face discussion with the customer.
Sometimes this discussion leads to the customer buying a savings product and sometimes it doesn't. But all that face time has to be paid for, and the traditional way of doing this is for the product provider to pay a commission to the person that talked the customer into buying. The customer pays for the privilege of having been persuaded - via an expense ratio built into the product.
What should we call the person that does the persuading? If their priority is to help customers think about retirement and prepare for it, we might call them 'advisers'. However, if the commission is their priority, then we ought to call them a 'salesperson'. In this case, even though the customer may be better off having chosen to save rather than go on holiday, they are likely to end up with the product that pays the biggest commission rather than the best product - a clear conflict of interest.
For years, insurance and pension companies used commission incentives to steer customers towards the products they most wanted to sell at a particular time. This system helped saddle life companies with guaranteed annuity liabilities that put not a few of them out of business. It also led to a wave of mis-selling complaints over products such as personal pensions and mortgage endowments.
These days, practitioners are thinking as much about risk and capital management as they do about commission incentive structures. But belatedly, supervisors have been looking into the issue, notably the UK's Financial Services Authority with its retail distribution review (RDR).
Among supervisors, consumer protection is something of a Cinderella compared with grand schemes for regulating insurance and pension solvency. Indeed, in countries with a tradition of rules-based setting of guarantee levels and discount rates, supervisors argue that conservative solvency requirements are the best form of consumer protection. The UK's Equitable Life is often mentioned in these conversations.
However, many practitioners understand that the changing consumer environment in the EU and beyond make such arguments increasingly tenuous. For instance, any retail financial adviser who is genuinely independent will not just consider life insurance products as a solution to a customer's needs, but banking and fund management products too. The RDR reflects this in its 'whole of market' language.
Moreover, using rules-based solvency requirements to enforce product uniformity in a given sector simply invites consumers and their advisers to look for regulatory arbitrage opportunities. For continental Europeans, such opportunities increasingly come from jurisdictions like Dublin and Luxembourg that are newly empowered under EU single market rules.
The fear among practitioners is that local supervisors smarting over the loss of their capital requirement-setting powers under Solvency II will shift to using consumer protection and market conduct law to exert their customary level of control. Perhaps belatedly realising this, the Commission of European Insurance & Occupational Pensions Supervisors (CEIOPS) has only just decided to set up a consumer protection sub-committee. With the EU Insurance Mediation Directive notorious for its poor transposition into national law, the new sub-committee may have its work cut out.