Below is the section from the latest RDR consultation paper that applies to pure protection.
For the full document pdf see the FSA website.
CP09/31 Retail Distribution Review: Pure protection (December 2009)
For these purposes, pure protection products are term assurance, critical illness cover (CIC) and income protection (IP).
Payment protection insurance (PPI) has so far been excluded from our analysis.
Introduction
4.1 We noted in CP09/18 that we were going to consider whether there were any benefits to adopting RDR approaches to other closely related markets. Since most retail investment intermediaries also transact pure protection45 business, and firms can elect whether to sell pure protection products under the Conduct of Business Sourcebook (COBS) or the ICOBS rules, considering whether we needed to make changes to our regulatory approach to pure protection was an obvious step.
4.2 In CP09/18, we also set out our thoughts on whether possible changes in firm behaviour, brought about by implementing the RDR proposals in the retail investment market, could contribute to new problems related to pure protection products - in particular, to an increase in unsuitable sales of these products.
4.3 Specifically, we identified two possible risks requiring further analysis:
• the pure protection market attracting a disproportionate number of investment advisers who may be unwilling to invest in further professional development related to investment advice (in turn, this could affect standards, and ultimately lead to poor consumer outcomes); and
• an incentive for advisers, when giving holistic advice, to focus on pure protection products on which product providers advance commission upfront, instead of investment products that do not (after 2012), at the expense of balanced assessments of suitability for their clients.
4.4 We asked for evidence to help us test our initial view of these risks. More generally, we also asked what consumer detriment, if any, would arise if we implemented the RDR proposals for the sale of retail investment products and took no action on regulating the sale of pure protection products under ICOBS by retail investment firms.
4.5 We would like to thank all those who responded to our questions and the firms and trade associations who gave us valuable assistance by giving us information in support of our analysis.
4.6 We set out below our conclusions from our analysis and a summary of the feedback we received. We also indicate areas for future consultation.
Summary of feedback
4.7 In CP09/18, we asked:
What consumer detriment, if any, would arise if we implemented the RDR proposals for the sale of retail investment products and took no action on regulating the sale of pure protection products under ICOBS by retail investment firms? We would welcome any evidence on this.
4.8 We received 240 responses to this question. The prevailing view was that there are very limited risks to consumers that might arise from not applying RDR approaches to pure protection, but that detriment could arise if RDR approaches were applied.
4.9 In relation to adviser charging, respondents voiced strong concerns about the impact this might have on consumers' willingness to seek advice on pure protection products, since these products are sold and not bought. Some respondents commented that adviser charging could be introduced, so long as factoring by providers was allowed to continue.
4.10 A significant minority of respondents commented that having two separate regimes would be complex and confusing. A few respondents went further to state that they believed the RDR approaches should be read across to pure protection to prevent poor practices (resulting from commission bias) from continuing in these markets.
4.11 We explain below how this feedback has fed into our analysis. Our analysis is based
on an assessment of the problems that arise in these markets, and an evaluation of potential knock-on impacts on the pure protection market following the adoption of the RDR in the investment advice market.
Nature of problems in the pure protection market
4.12 The pure protection market has been in decline since 2004 (by 17% in terms of total numbers of new contracts sold46). The value of new premium sales has also dropped significantly. There has been a significant decline in mortgage-related sales of term assurance and critical illness cover following the decline in mortgage lending, but this has been replaced, to some degree, by other non-mortgage related sales.
4.13 The overall picture in the pure protection market is of a falling number of complaints to the Financial Ombudsman Service (FOS) and an absence of the kind of large-scale mis-selling episodes that have been seen in the investment advice market. Our assessment is that the adviser behaviours that have driven serious detriment in the investment advice market - the sale of expensive or inferior polices and switching - are less prevalent in these markets because of the inherent differences between pure protection and investment products. In particular:
• The cost to the customer is relatively transparent (in contrast with investments, where the cost is typically a function of the fund value and therefore subject to change). This will be enhanced as the remaining firms implement our standard for protection sales requiring disclosure of the total amount of premiums over the term of the contract as well as the monthly premium.
• Customers are ‘budget sensitive' and are interested in reducing the premium.
• Pure protection is a ‘distress purchase' bought to cover something that the customer hopes will not happen, in contrast with an investment where the consumer's aspiration is for a financial return.
4.14 Several respondents also highlighted these differences to us, mentioning, among other matters, the greater ease with which consumers can compare pure protection products, the lack of suitable non-commission substitutes and the fact that consumers can typically cancel their policies without cost.
4.15 One problem that we have seen consistently in previous research relating to pure protection policies, most recently published in April 2009,47 is that advisers do not ensure that customers understand the exclusions to cover on critical illness policies. We are currently carrying out research as part of our post-implementation review of ICOBS that will help us further understand the nature of this problem - for example, whether it is due to lack of knowledge on the part of advisers, a lack of skill in being able to explain the detail to customers, or a lack of incentive to do so. We will consider what action we need to take when we have analysed the outcomes of that research.
4.16 A further issue that we have noted from our Retail Mediation Activities Return (RMAR) data is that only around 40% of retail investment intermediaries sell all three pure protection products. This could be attributed, in part, to different customer profiles of different firms: for example, firms with an older client base may sell more life assurance for the purposes of inheritance tax planning, with their customers relatively less interested in IP and CIC. However, we would be concerned if this were an indication that relatively few advisers consider a customer's full range of protection needs so that the customer buys a product that only partially covers those needs and remains unaware of other suitable products. We explain below how we intend to address this through our proposals on labelling.
4.17 We do not think that remuneration structures are a key driver of the problems noted above and so, from this analysis, extending adviser charging to pure protection sales would not enable us to target them.
4.18 We are also considering whether certain market innovations have the capacity for introducing new kinds of consumer detriment into this market, specifically:
• The growth of internet-based sales of term assurance policies: it may not be sufficiently clear to consumers that they may not be eligible for the cheapest advertised prices, in which case the apparent competition benefits of comparison sites are limited for many customers.
• Hybrid products are appearing on the market that combine features of long-term pure protection products with short-term benefit periods. Customers may not realise that the length of time for which benefits are payable is limited. We will be monitoring these developments closely.
Risks if we do not apply adviser charging to pure protection
4.19 Many respondents to CP09/18 expressed views on the risks of consumer detriment if we did not apply adviser charging to pure protection. Most respondents who expressed a view agreed that advisers may be incentivised to sell more pure protection in order to continue to earn up-front commission, but the majority of those indicated that they did not believe this would lead to consumer detriment. The two main reasons commonly cited by respondents for this were:
• there is scope for advisers to sell more pure protection products because many people are underinsured; and
• the current ICOBS rules are sufficient to ensure pure protection products are sold appropriately.
4.20 We noted in CP09/18 that the sale of more pure protection might be beneficial to consumers, providing these sales were made with a proper assessment of suitability for the individual concerned. Our analysis and the feedback we received did not identify any drivers that would operate in these circumstances that would mean advisers fail to do this. A number of respondents also argued that advisers have been increasing their focus on pure protection in the current economic downturn and this has not been accompanied by an increase in inappropriate sales practices. As these are long-term policies, however, it may take some time for any problems to emerge.
4.21 So, we believe that while there may be an incentive to sell more protection, our existing regulatory approach provides a sound basis for protecting consumers from inappropriate sales (provided that firms are compliant).We are certainly not of the view that it is impossible to mis-sell pure protection. If we see new patterns of commission-driven sales arising that are to the detriment of consumers, we will, of course, act.
Remuneration transparency
4.22 While we do not believe there is a case for regulatory intervention to change radically the way advisers are remunerated for pure protection advice, our analysis did identify another source of risk - relating to remuneration transparency - if we do not apply adviser charging to pure protection sales.
4.23 When a customer is paying a fee for investment advice and receiving advice on pure protection products at the same time, the customer may believe that advice for both types of product are included in the fee. If they understand that the adviser is remunerated separately by the provider for the pure protection sale, it may alter their perception of the value of the fee. A number of respondents also highlighted this risk to us.
4.24 We believe that there is, therefore, a case for requiring commission disclosure where pure protection is sold under ICOBS alongside investments. There is currently no requirement for advisers to do this because our view has been that the customer is most interested in the amount of premium they must pay, rather than the amount that their adviser receives. However, with the changes proposed for the way advisers can charge for investment advice, we think we need a new requirement for transparency where pure protection is sold at the same time as investment advice. This would make it clearer to the customer what is included in the investment fee and how the adviser is remunerated for the pure protection element of their advice.
4.25 We consider that the same risks apply where a customer is paying an adviser charge to a bancassurer or provider and they are receiving advice on a pure protection product at the same time.We are considering whether a commission equivalent figure should be disclosed to help the customer understand how they are paying for the pure protection sale.
4.26 We are now developing our proposals on commission disclosure for the sale of pure protection sold under ICOBS alongside investments and intend to consult at the end of March 2010 on draft rules.
Adviser service labelling
4.27 The RDR proposes to introduce a new standard for independent investment advice aimed at ensuring that advice is genuinely independent, covering the broad range of products that an independent adviser would be expected to consider when making a recommendation. Advisers who only select from a limited range of products and providers will have to notify their customers that their advice is restricted. The Mortgage Market Review DP09/348 also indicated that this labelling regime could be appropriate for mortgage advice.
4.28 We think there is merit in adopting a labelling regime for pure protection advice that is consistent with that proposed for investment advice and under consideration for mortgage advice.
4.29 We do not currently have an explicit requirement to consider the full range of pure protection products when assessing suitability. We feel that an ‘independent' adviser should be required to consider the full range of possible ways of meeting a customer's protection needs in making their suitability assessment. Advisers could choose to limit their advice to one type of pure protection product, but they would have to label this advice as ‘restricted'.
4.30 Our considerations have to date been limited to sales by retail investment intermediaries, but on the face of it, there is a case for applying consistent labeling across all distribution channels for pure protection advice.
4.31 We expect to consult on this issue when the Mortgage Market Review proposals on
labelling have progressed further.
Professionalism
4.32 In CP09/18, we identified a risk that ‘... the pure protection market may attract a disproportionate number of investment advisers who may be unwilling to invest in further professional development as required by the RDR (in turn, this could affect standards, and ultimately lead to poor consumer outcomes)'.
4.33 Very few respondents thought that this risk was significant and we have not been able to identify new drivers for poor quality advice that might arise in these circumstances. In any event, it seems unlikely that there is a large potential market for such specialist advice. In terms of the requirements on retail investment advisers to take exams in pure protection, there is currently a requirement that they pass a module at Level 3, and this will continue to be the case under the new arrangements.
4.34 Given the existing problems that we have identified in this market, we remain open-minded about how the package of increased professionalism standards for investment advisers might apply to pure protection. We will consider two issues alongside the development of the professionalism proposals for investment advisers:
• Whether we should require that advisers subject to professional standards for investment advice under the RDR are also subject to these higher standards when advising on pure protection: a potential concern is that it might be confusing for consumers if the activities of an individual were to be subject to different standards depending on the product or service being advised on.
• The wider question of the case for specific application of professional standards to pure protection advisers who do not give investment advice: it may be that the application of some or all of the proposals for investment advisers relating to professional conduct, qualifications, and keeping knowledge up-to-date would help mitigate some issues of consumer detriment in pure protection sales.
4.35 Some respondents to CP09/18 considered that professional standards should apply to all of an adviser's activities and/or to all advice on pure protection, on the basis that an improvement in professional standards would result in improved advice for customers. However, they noted that the standard to be applied should be appropriate to the nature of pure protection advice and relevant to the activities of the adviser.
Q12: Please provide any analysis or evidence you may have on the application of professional standards (professional conduct, qualifications and keeping knowledge up-to-date) to pure protection advice, both:
a) where it is provided by an investment adviser; and
b) where it is provided by an adviser who does not advise on investments.
Sales under COBS
4.36 Many respondents commented on the difficulties caused by having two different regimes for investment and pure protection products, since so many of them are sold by the same firms. Firms should note that the option remains to elect to sell pure protection products under COBS, if firms feel that the complexity of operating two different compliance regimes would impose too much cost on their business. If we implement the proposed RDR rule changes as drafted in CP09/18, advisers electing to sell under COBS will be required to apply all the new COBS rules to their pure protection advice, including those on adviser charging.
Review of IMD
4.37 The European Commission has announced plans to update the Insurance Mediation Directive (IMD) over the next three years. This could affect each of the areas discussed above. We will maintain close involvement with this review process.
Contact
Comments on this section (pure protection) should reach us by 16 March 2010.
Please send them to:
Emma Thomas
Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
Email: [email protected]
