Entrepreneur Ivan Massow caused a stir this week with the launch of his new trail-hunting business paymemy.com.
It allows clients who discover they are paying renewal commission but receiving nothing in return to apply to get 80% of any future payments rebated to them.
All customers need to do, Massow said, is switch servicing agent to his company and let it track down and refund the money, although it will keep 20% for its efforts.
He has been accused of targeting advisers' clients.
IFAonline put some questions to Ivan. Here is what he had to say...
1 You say clients should not be paying something (trail commission) for nothing in return. But aren't you just offering the same, i.e. nothing, at a lower price?
It is untrue to say my customers receive nothing for their fee. We become their servicing agent. We hold on to their file and we make changes to their policies as and when they require. We also have an advisory service on a recommendation basis.
Plus the business of accounting and the process of collecting of commission is in itself a full job. It is complicated. Providers send receipts in paper form and we get it all logged in a trust account. It all costs money. We inform clients the moment we receive the trail and provide them with the facility to access it instantly. We probably do far more than any other servicing agent and only at 20%. It is hard I'm telling you. We have to pay for all sorts of security - secure servers, PI insurance - it is never-ending, expensive and complicated and it is worth every penny.
2 Commission will be banned from January 2013, yet you've built your business model around it. How do you understand the FSA's stance on trail commission?
The FSA does not like to provide clarity. We got our information from the market generally and from reading everything that you have been reading. As we understand it, provided you are giving some form of service, which we are, in return for the commission you are taking, then you are fine. It is not as if a client can go directly to a provider and ask for their trail commission. You have to use a financial intermediary such as ourselves, who is FSA registered, has an agency and has the facilities to receive money and reconcile it, and also pay clawbacks if necessary.
What is unclear is whether you can keep it all and not [provide a service] But we're not going to do that. We're asking to keep the amount that we do something for. So we're not even breaking RDR rules.
I think if the FSA was unhappy, it simply wouldn't have authorised the business. Believe me it wasn;t easy. It took a year. It was rigorous and depressing, but I'm pleased it's all done.
3 You are not authorised to hold client money. How will you collect and distribute all that 'unearned' commission?
We spoke to the FSA at length about this. The contract with the IFA is with the insurance company. It [the commission] belongs to the IFA because it is their income until the moment the IFA decides to repatriate it with the client. It would be different if we decided to hold on to the commission we collect and, say, invest it. Then it would be client money.
This is how it works: The client writes to us, fills out the form, we go to the provider, the money gets transferred to an account and we then email the clients. They all have usernames and passwords and then they can transfer the money across almost immediately. If it is 45p they may not bother; they may wait until it's, I don't know, 85p. But until they decide to take the money out, it is our money technically. But the client is entitled to take it the same day.
4 How do you expect to profit from this?
We're trying to make it as automated as possible so that pretty much every action kicks out automatic emails from the system to the client. But also I'm hoping that, in addition to the 45p cases, there will be some quite substantial cases. They are estimating there is something like £1.5bn worth of trail commission paid each year. I do not know how accurate that figure is, but it is certainly a lot.
5 Won't some advisers simply under-cut you?
I think people will end up offering this service. We have put into our terms of business that it [80%] is our opening amount because it is a complicated set-up but of course, prices will come down. But it's complicated. The people who built my website are the people who built Tesco Direct's website. It took a long time. It's complex and secure. If any IFA wants to write to their client and get out the cheque book and pay the client manually, they are welcome to. But the reality is that what we are doing is quite complicated and sophisticated and I will be surprised if many of them want to do it. It is not their job. They are advisers. We're specifically trying not to offer advice. We're not targeting financial advisers. We're targeting the ten million orphans. There's an awful lot of people where the commission is just simply going nowhere.
6 Is there a danger you will tempt clients who currently receive perfectly good, ongoing advice for their adviser, to leave them?
I'd like you to show me an IFA who does not, the moment he meets a new client, attempt to move the trail over by getting the client to sign a change of servicing agent form. It's a tough business. But we are not targeting that kind of behaviour. I'm slightly unapologetic if [we do take some advisers' clients] because I think IFAs have been probably taking too high trail commission. Some have been moving people on to higher trail commission. I've got a horrible feeling that IFAs have been churning clients into high renewal commission policies, probably charging a fee for the upfront advice as well, and then taking the high trail.
Some people will get caught out but that is not our business plan. Can you imagine if we're lucky enough to get a run at the ten million orphan clients. Why would I really want to irritate advisers?
7 Won't commissions from pension plans be treated as 'unauthorised payments' by HMRC?
Ivan Massow then read a statement:
The question of whether commission rebates for ensions fell afoul of the unauthorised payment rules was one of our first questions to the HMRC (long before we'd even started to build the site).
They informed us that the provision set out to prevent fraud had never sought to prevent the legitimate rebate of existing commissions. They then referred us to the HMRC RPSM09106040 guidance notes which clearly demonstrate that the rules do not apply to this specific situation.
(i) Because there is no "new business" here and no "new commission" has been created, we are outside paragraph one. As such, the rules do not apply to us.
(ii) In addition, this rule does not apply to us/our clients because we are simply collecting an ongoing expense to which the original adviser was entitled and rebating this where the amount is disproportionate to the advice and work we undertake.
(iii) Moreover, HMRC reminded us that RPSM09106040 is an anti-avoidance measure which is designed to prevent policy holders setting up pension schemes where they receive a large kick backs in commission at outset from their pension schemes by way of commission payment shared with their adviser. This would be unlawful as it is effectively a way of taking benefits from your pension before age 55 and defeats the object of a pension which is to ‘provide income in retirement.' In short, these rules were never designed to penalize honest brokers offering our kind of arrangement.
Of course we do tell all clients they should register any gain they get on their tax return. There is a potential for a tax liability.
What do you say to those who criticise your approach?
I'm not surprised IFAs have reacted strongly because this is their livelihood, but there was one or two people suggesting that because Massow Rainbow Group [Massow's previous company] went into receivership, that somehow clients might be unsafe with me. But Massow's went into receivership after I sold it. I then came back and rescued it. No client was ever affected and the company still exists today, albeit in the guise of Helm Godfrey.
Also, we've created the accounts [where the commission gets paid and where it is available to customers] so they are ring-fenced in a trust. In the event of anything happening, the clients can just change their servicing agent again.
I don't mind a good quality fight when it comes to the issues of tax, but luckily they are questions that we thought of. I wasn't expecting the scaremongering.
Ivan Massow was talking to Scott Sinclair
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation