As someone who has previously bought assurance policies while closing existing ones, I am confused and concerned abut the current row over churning. What is this and what should I do if I feel I have been churned?
Mr T.P. Dublin
Churning is the term used when a policyholder is encouraged to cash in an existing assurance policy well before it matures sometimes a matter of only two or three years after it has been opened in favour of a new one. This benefits the salesperson, who normally works on a commission basis and who receives that commission for every new policy sold.
From the customers' point of view, they are no-win deals; they face new set up charges and additional commissions. In addition, the old policy fails to yield the expected benefits, including bonuses, because of its early termination.
Given the recent controversy involving Irish Life, it is worth pointing out that your policies have been with another assurer.
One of the problems with the industry in Ireland is that it relies on self-regulation.
The current Insurance Ombudsman, Ms Paulyn Marrinan Quinn, has called for an independent regulator in the light of the latest controversies over churning. One of the concerns she cites is that brokers, who are responsible for a large proportion of assurance policies sold in Ireland, fall outside the remit of her office. It is only empowered to look into cases involving agents linked directly to an insurance firm.
When looking at whom to contact in cases of suspected churning, clients are spoilt for choice, but not necessarily for effective action.
In the first instance, a policyholder should report any misgivings to the company which has issued that policy, preferably in writing. All the major companies claim to have complex policing procedures to prevent or to tackle such practices.
The Irish Insurance Federation is the trade body for the industry and sets down guidelines for members. Similarly, the Irish Brokers' Association represents and regulates insurance brokers under the authority of the Department of Enterprise, Trade and Employment. Ultimately, it is the Department which is the supervisor of the self-regulation in the industry. While it has acted swiftly to inquire into the allegations surrounding Irish Life, it has been accused in the past of not being pro-active enough and of failing to carry out spot checks.
If all else fails, there is always the Consumers Association of Ireland which has taken a high-profile, highly critical stance on the industry in the wake of the most recent allegations. While the lobby group has no regulatory role in relation to churning, it is active in relation to consumer protection and the law.
While events, such as the recent reports of churning, consistently provoke calls for a tighter regulatory framework, it is worth noting that a recent report in Britain has claimed that an elaborate regulatory regime dedicated to investor protection has failed to cut the high cost of products to customers or the awareness of customers of the details of policies.
The reason? The customers themselves. No matter how watertight the regulations, they cannot prove effective as long as customers fail to read the small print and take responsibility for questioning the value of the product being sold rather than simply buying the salesperson's patter.
I receive shares through a company ESOP scheme as a 4 per cent bonus annually with an option to match it subsequently with another 4 per cent of salary foregoing. Obviously there are tax benefits, so I would like to maximise this to the 15 per cent allowable and wonder if there are any Government restrictions. My intention would be to fund the remaining 7 per cent from basic gross salary.
Ms D.C. email
What you call an ESOP (Employee Share Option Plan) appears, in fact, to be an approved profit-sharing scheme. This essentially converts a profit-sharing bonus into shares of the company you work for or its parent.
In addition, employees may use a percentage of basic gross salary (salary foregone) to purchase further shares.
Under the scheme, the shares are held in trust for a minimum of two years. Thereafter the scheme member may sell them, but they may be liable for income tax. On the other hand, if the shares have been held for three years, they can be sold free of income tax, although capital gains tax will apply. This is a change from previous years. Up to 1997, the shares had to be retained for five years to avail of the tax-free status.
As with practically all tax efficient investments, there are limits on how much can be put into such a scheme. No employee participating in such a scheme may be allocated more than £10,000 worth of shares in any given tax year.
There are also controls on how much the employee may purchase from "salary foregone". While it is true that the employer-funded bonus can be as high as 7.5 per cent and the employee purchase can similarly be 7.5 per cent, notionally giving a maximum exposure of 15 per cent, the one depends on the other, as Ms Gemma Jacobsen, manager of KPMG personal financial services division points out. The employee purchase cannot amount to a greater percentage of basic gross salary than the employer-funded bonus.
What this means in your case, is that your option to buy company shares is limited to a maximum of 4 per cent of basic gross salary the same as you receive by way of a bonus. No one likes to see a tax-efficient option slipping away but, in this case, I am afraid you have no choice.
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