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The latest buzz phrase in UK financial services is ‘factory gate pricing’ – meaning a price reflecting the cost of production and prior to distribution and marketing costs being added.

So a non-marketed pension product offered via a nil commission structure can be said to have factory gate pricing, while the same product priced to include adviser commissions is deemed being priced at adviser front-office rates.

The phraseology has triggered the latest periodic review of product distribution and pricing disclosure in UK financial services.

The Financial Services Authority (FSA) is reviewing retail distribution while the Association of British Insurers (ABI), the trade body for the product providers, is talking about a factory gate pricing model called Caris (Customer Agreed Remuneration for Intermediary Services), where customers agree with advisers what they will pay for advice.

So what exactly is going on here? A superficial analysis would suggest that the ABI is anticipating an FSA attempt to break the stranglehold that advisers paid on a commission basis have over retail product distribution and is seeking to position itself accordingly.

But it should be remembered that the commission model has proved extraordinarily resilient for a variety of reasons.

Back in the nineties, disclosure of adviser commission in key feature documents was meant to show customers exactly how much commission they are paying.

This, it was thought, would force commissions down.

However customers were found to be either apathetic or confused by the mass of paperwork, and commissions survived and prospered.

In addition, many customers (similar to other markets globally) prefer commissions to forking out and paying advisers fees directly, which might incur value added tax in any case.

There is a general trend in the UK towards adviser remuneration via upfront fees, though in many cases this is done by offsetting commission against a fee.

It is thought that only a few specialist advisers are purely fee-based, along with the large employee benefit consultancies that serve corporate clients.

Against this backdrop, the FSA and others are aware that commissions may well lead to product bias, churning and other dubious sales practices, to the customer’s detriment.

Hence the desire to align costs with charges by factory gate pricing.

Anyone who has studied A-level economics would be aware that telling providers how to price their products is unlikely to be a workable policy as cross-subsidies, loss-leaders and profit maximisation over product life-cycles all conspire against dogmatic, regulatory-led price controls.

Mind you in saying that, stakeholder pensions with a government price cap have forced prices and commissions down in retail pensions. Could this work across the market?

The perennial challenge of financial services seems to be in persuading providers (and advisers for that matter) to align their interests with those of their customers.

Given the asymmetry of knowledge and infrequency of purchase for products like mortgages and pensions, this is hard to do.

Perhaps a nudge from the regulator over pricing is the right idea after all?