Direct Finance: How the telephone took over from the high street broker

Tony Lyons reports on the rise of products sold by phone

Using the telephone to buy insurance, banking, mortgages and investment services seems to have been around for ever. Yet it was just 12 years ago, in 1985, that going direct began when Peter Woods and some colleagues decided that they could sell cheaper, value-for-money motor insurance over the telephone.

Direct Line, the company he founded, now owned by Royal Bank of Scotland, stripped away the jargon, asking simple questions in everyday English.

More important, from small beginnings and a highly successful marketing campaign with the ubiquitous red telephone, Direct Line began a revolution in how financial services were sold.

It started slowly, however, taking more than five years for policies sold to reach 500,000. Today, Direct Line has well over 2.2 million motor policy-holders.

By 1990, Midland Bank had begun the first telephone banking service through its First Direct subsidiary, a bank which opened for business at one minute past midnight on a Sunday morning and has remained open 24 hours a day, seven days a week ever since, with no high street branches.

Over the years, the range of services on offer over the telephone has multiplied. Life assurance, personal equity plans (PEPs), pensions, stocks and shares, mortgages and loans are now just a call away.

Much of the impetus to the growth of direct services has come from new entrants to the financial sector. Names such as Virgin and Marks & Spencer, previously known for their retailing strength, now feature among the leading pension and PEP suppliers, carving out a large share of the market.

Traditional insurance companies and investment management groups had to respond. In the early days, they often set up a new subsidiary with a different name so as to not annoy their financial adviser market. A typical example was the Insurance Service, which was actually owned by Royal Insurance. Nowadays, they are happy to drop the disguise.

Investors and savers have discovered that the cost of buying by telephone is usually cheaper than using a bank, building society or financial adviser.

Nowhere is this better illustrated than with personal pensions. One of the first to offer direct pensions two years ago was Merchant Investors. Already a low-cost provider, investors who buy its pension plan over the telephone save themselves up to 5 per cent of the premium - the commission paid to financial advisers. Together with other direct providers such as Virgin, Eagle Star, Scottish Widows and PensionStore, they have shown just how much more expensive are the policies sold by traditional means with their higher charges.

Mortgages provide another good example of the savings. By getting a home loan over the telephone, house buyers can usually save at least half a per cent on the mortgage rate. Among those operating in this market are FirstMortgage, Bradford & Bingley and, again, Direct Line.

The key to buying financial services in this way is to know in advance what you want. The providers will not offer advice, usually because they have not been trained to do so or it is not allowed under the investment rules. But a little bit of homework to decide what is needed, and a "ring round" to compare prices, is often enough. If the provider thinks a customer needs help and advice, they will refer them to an independent adviser.

What of the future? Already many of the financial services now available by telephone can be purchased by computer through the Internet. While this is only just beginning, it could grow as rapidly as telephone services have over the past decade.