Last updated: September 20, 2013 9:09 am

Partnership fall puts commissions in focus

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It was among the UK’s most eagerly anticipated stock market launches of recent years.

Partnership Assurance’s strategy of offering higher pension income to retirees with low life expectancies had helped it become one of the UK’s fastest-growing private companies.

Investors including the Government of Singapore Investment Corporation were lured by the prospect of further expansion – not least because regulators are encouraging consumers to shop around for better annuity deals.

They were in for an unwelcome surprise. Shares in Partnership dropped 7.2 per cent on Thursday as investors responded to a report in the Financial Times that the retirement group might have breached a new ban on commission payments to financial advisers.

The Financial Conduct Authority warned this week it had uncovered evidence some insurers were flouting the rules by offering financial advisers other inducements to sell their products – including paying for overseas hospitality events attended by advisers’ spouses.

The FCA did not name any suspects. However, people familiar with the matter disclosed that the regulator had referred Partnership, along with one other company, to its enforcement division.

Partnership on Friday acknowledged that its subsidiary Partnership Life Assurance was under investigation by the FCA in relation to its services agreement with one advisory firm. It said the probe did not mean “the FCA has determined that rule breaches and/or other contraventions or offences have occurred”.

The group said it would co-operate fully with the investigation. Partnership shares were up 0.5 per cent in early Friday trading at 410p.

Barrie Cornes of Panmure Gordon, which helped bring the company to the market along with Bank of America Merrill Lynch and Morgan Stanley, said that even if Partnership was fined as a result, the sum “is likely to be small and probably immaterial”.

Such assurances failed to calm investors’ nerves, however. The sell-off – which erased much of the gains made since Partnership, backed by private equity house Cinven, secured a bumper £1.54bn valuation in its June listing – indicates investors have wider concerns about the company’s business model.

At 410p, the shares remain above the 385p listing price, although they have now underperformed the FTSE All-Share index by 13 per cent since the flotation.

Investors were attracted to the IPO by a proprietary database Partnership has built over almost two decades that links life expectancy with medical conditions, which it claims gives it an edge in selecting the risks and pricing the specialist annuities.

The company has boosted its share of the “non-standard annuity” market from less than a tenth to more than a quarter since 2006.

However, as one analyst puts it: “This [the regulators’ intervention] is raising questions about how they have done that.

“Have they done it by having a superior product and data, or is it because they have perhaps cut some corners and been more aggressive?”

Their business model is set up to take advantage of an increasing use of advisers. But how do they go about remunerating, and incentivising, advisers in a post-RDR world

- Alan Devlin, analyst at Barclays

At the time of the initial public offering, investors focused their questions mainly on a competitive threat from mainstream annuity providers, as the likes of Legal & General expand in Partnership’s niche end of the market.

Far from being regarded as a potential threat, investors who subscribed to the IPO largely regarded changes to the industry’s distribution model as a positive.

This is in part because regulators are trying to encourage consumers to consider switching from a company with which they have built up their pension pot to an alternative provider when they convert their lump sum into an annuity.

Even so, ahead of its IPO the company did highlight potential risks arising from separate reforms that ban commission payments to advisers.

Before the retail distribution review took effect at the start of the year, Partnership paid commission to financial advisers, in common with rivals. But Partnership relies wholly on intermediaries.

Alan Devlin, analyst at Barclays, says: “Their business model is set up to take advantage of an increasing use of advisers. But the question is how do they go about remunerating, and incentivising, advisers in a post-RDR world.”

Last year a tenth of sales came from “corporate partners” such as Lloyds Banking Group, Legal & General and Virgin Money. Financial advisers, including networks such as Sesame Bankhall Group and Openwork, accounted for 82 per cent.

In its IPO prospectus, Partnership said distribution channels could be “adversely affected” if regulators were to “consider that any of the agreements the group has in place with distributors . . . are at risk of non-compliance with [their] interpretation of the rules, or the spirit of, the RDR”.

It added: “In the event of any mis-selling of products by FAs or other distribution partners, the Group could face the risk of regulatory censure from the FCA, fines and related compensation costs.”

The sell-off on Thursday comes after a similar decline three weeks ago, when the group missed first-half sales forecasts.

At the time, Steve Groves, chief executive, cited the retail distribution review as a factor – although only in so far as the regulatory reforms had “disrupted” financial advisers.

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