The FSA's verdict on protection and the RDR is in. Graham Harvey examines the changes that will be needed as a result
The protection industry spent last year campaigning to keep protection out of the RDR. The main argument for this was that consumers were not unhappy with their advisers being remunerated by commission.
It was a good case. Unlike some of the more complex financial products, the price consumers pay for protection is clear, lapsing a policy is clear because their cover simply ceases, and there are no unforeseen financial impacts such as Market Value Reductions.
After consulting widely among the relevant parties, the FSA has reached the same conclusion.
Its RDR consultation paper published just before Christmas revealed that adviser charging will remain optional for pure protection products.
The announcement has been largely welcomed by advisers and consumer groups, at least publicly.
More options
It gives advisers more options around the business model they choose to run, and to decide what works best for their particular mix of clients. It may also help advisers moving over to fee-based models to have a cushion of commission still coming in as they make the transition.
For consumers, it will mean they can still access independent advice about their protection needs, even if they are not in a position to pay separately for that advice.
However, even though the industry has got its desired outcome on commission, there are still many practical issues of distribution for the protection industry to address ahead of the RDR being implemented in 2012.
For example, clarity of communication to consumers will become even more important. People will need to be able to compare not only different providers, but also different advisers.
For advisers moving to a fee-based model, the FSA has decided that disclosure of fees will need to be made so that clients can easily see the price of the product and a separate price for the advice.
Consumers however, need to take care with comparisons to ensure they're comparing on a ‘like for like' basis.
For example, when comparing the fees charged by two different advisers, one adviser could just be advising on the purchase of a policy whereas another might also be offering an annual review of the client's protection needs. Hence the difference in the fee charged.
Many advisers may decide upon a dual model for remuneration - fees for investments and commission for protection.
Reducing clawback
There may also be some element of cross-subsidy as the combination of fees and commission may appear too costly. Fees may be given up in favour of commission or vice versa. However, foregoing commission may be more sensible, reducing the impact of clawback should there be an early lapse on the protection policy.
For the consumer, such cross-subsidy presents no problem because as far as they are concerned they have simply had one piece of advice covering a range of needs. The key is clarity and explanation.
When comparing protection products, consumers also need to make sure they're comparing like with like, so they ultimately choose the product appropriate for their needs and budget. This is where getting expert advice can be truly valuable.
What is obvious is that client communication needs to be crystal clear.
Another practical issue is that of adviser competency and qualifications. The FSA is continuing to consult on this, with a verdict due this year.
One option they are looking at is whether to bring in some of the requirements for investment advisers for those advisers selling protection.
It is also still not decided whether or not advisers who offer advice on both investments and protection will be subject to the same professional standards for both.
It could be the case that a new qualification is brought in for ICOB advisers alongside the changes already signalled for COB advisers.
If qualifications are introduced we must hope that they are relevant for protection. This could include product knowledge, state benefits, trusts, business protection and general insurance.
If the FSA concludes that higher qualifications for ICOBs advisers are necessary, or perhaps optional, any deadline for achieving them would probably be after 2012.
An additional area that the FSA is yet to rule on is the labelling of protection advice.
An initial suggestion it has put forward for consultation is that advisers who do not offer advice on the full range of protection products would need to describe their advice as ‘restricted'.
On the face of it this seems a good idea. So many consumers are offered life cover but never delve more deeply into what their wider protection needs might be. Such labelling could lead advisers to offer holistic protection planning, in order to avoid having to label their advice restricted.
Potential for confusion
However, there is potential for consumers being confused here. On the one hand their adviser is offering ‘restricted' advice if they are not offering whole of market advice. But in this instance their advice is ‘restricted' if they are offering fewer products, even if these cover the whole market. Equally they could be tied to offering the protection products of one provider and still describe their advice as unrestricted because they offer a full range of protection products.
It is clear more thought needs to go into the different terms used to describe advice to ensure clarity for consumers.
Overall, the changes we are seeing now may have a longer term impact on the protection industry.
We may find that consumers become more used to the idea of paying for advice. This could see the market move away from initial commission and become wholly fee-based.
This could be a major benefit for protection providers. A move away from indemnity commission would reduce the initial outlay on commission payments, which can have a big impact on provider cashflows. It might also make it easier for new providers to enter the market, because they wouldn't need such a large amount of cash liquidity to do so.
However, for advisers the impact could be quite the opposite. Losing upfront commission payments might well endanger their future viability. This would not be a good outcome for anyone - consumers, providers or advisers.
The FSA announcement that commission can still be received for the sale of protection means we may see the continued focus on protection which we have seen over the past 18 months.
Everyone in the industry is well aware of the Swiss Re protection gap of £2.3 trillion. It is certain that neither the industry nor the FSA wants to see this gap increase.
Proper advice for customers with their own personal protection gap, which helps them make informed choices about their financial protection needs, can only be a good thing.
Whatever the FSA finally decides regarding protection advisers and the RDR, the industry cannot afford to sit on its laurels. Even with commission still allowed, there will need to be a major change. This should result in a much stronger, more trusted protection industry in the future.
Graham Harvey is managing director of protection at AXA
