The Financial Conduct Authority (FCA) has launched a market study to examine the distribution of pure protection products to consumers acting in their personal capacity.
The study aims to ensure that the market operates competitively and in the consumers’ best interests.
The FCA is focusing on whether consumers can purchase products and services that meet their needs, offer fair value, and support informed decisions.
The FCA has observed some positive indicators, such as a relatively low number of complaints received by the Financial Ombudsman and over 95% of new consumer claims being paid out on products like term assurance, as noted in Association of British Insurers data.
However, it has also identified areas where distribution may not be fully effective.
The study will scrutinise commission structures, competitive constraints on insurers and intermediaries, and the role of other market participants like re-insurers and lead generators.
It will also explore potential barriers to innovation and investment.
REACTION:
David Gray, senior consultant actuary at Broadstone:
“Pure protection plays a critical role in our financial services ecosystem but it also delivers products that are implemented at times of extreme personal loss, distress and uncertainty in the case of death and serious illness or injury.
“It is really important that the protection sector is working well for consumers and that the selling of products like income protection and whole of life insurance is delivering fair value and comprehensive cover over a suitable term.
“While the FCA points to many current positive indicators and outcomes for consumers, it evidently has concerns around aspects such as commission arrangements and barriers to investment and innovation.
“We note the changes to the terms of reference after listening to stakeholders including ‘work to develop a better understanding of the magnitude of the protection gap and its underlying causes’.
“We believe that a wider take up of affordable protection policies can greatly increase Societies’ financial resilience.
“The market study is in line with the regulator’s intense focus on value and fairness for the consumer.
“These objectives are crucial for building trust and ensuring that the system is working throughout the value chain.”
Tim Hogg, director at Fairer Finance:
“Pure protection markets could be working better for consumers. The design and size of some commission payments appear to be hurting – rather helping consumers.
“The FCA has started to do its homework in understanding commission payments, and is signalling that it will get under the skin of whether commissions should be restricted or reformed.
“Ultimately, many people aren’t buying life insurance when they would benefit from it. Communications about life insurance remain complex and off-putting.
“Purchase journeys can be lengthy and contain high levels of friction triggering negative emotional responses with the medical questions.
“It’s great that the FCA will look at how to facilitate more innovation in this market – from the design of communications and journeys, to the way that products work.”
Jamie Jenkins, director of policy at Royal London:
“The FCA protection market study, launched today, is a great opportunity to assess where the protection market currently delivers well for consumers and where improvements can be made. Enabling consumers to access products that suit their needs from providers they can trust supports a market where they can be financially resilient across their lifetime.
“It is imperative that there is a thriving market of providers to encourage competition and innovation.
“This is particularly important at a time when the Government is reviewing the role of the State through welfare and employment reforms that seek to clarify where support will be offered, and the extent to which that can be given.
“Royal London is particularly interested in several key areas that we hope will be addressed.
“First, it’s acknowledged that protection is a commonsense purchase, and one which is typically sold rather than bought.
“Advisers need incentives to help their clients understand their needs and how best to meet them.
“Any solution should recognise the need for flexibility in commission while ensuring recommendations are unbiased and provide fair value.
“Secondly, building consumer confidence is an important step towards improving the market.
“The industry needs to enhance its practices and ensure that consumers can make informed decisions about their finances and trust in the support being offered to them.
“Finally, consumers need access to comprehensive and targeted advice to ensure they are able to consider protection while accommodating their diverse needs and budgets.”
Ian McKenna, founder and CEO of Protection Guru:
“It’s good to see the FCA identify the specific areas they will be exploring under this review and clarify the areas to be excluded.
“By concentrating on the mainstream Term, Critical Illness, Income Protection and Whole of Life products the FCA are recognising where there are significant opportunities for change and innovation.
“We are particularly pleased to see that the Review will not look at the assessment of fair value in isolation but examine this alongside cross cutting obligations under consumer Duty.
“We also applaud the decision of the FCA to examine fair value in the context of the quality of services and the overall price consumers pay.
“Day in, day out, we see situations where consumers can be offered products that are significantly higher quality for just a small additional outlay over the cheapest product, we see this shows where fair value assessment can deliver far better consumer outcome than the pre-Consumer Duty approach which favoured the lowest cost.
“In the context of today’s announcement, we believe our work released earlier this week to highlight how identify how selecting best value for consumers can bring additional revenue to advisers to offset the extra work Consumer Duty necessities shows why advises need research tools capable of analysing Term and Income Protection as well as Critical illness, rather than just having data tables that they need to review and analyse manually.
“It is also encouraging that the regulator has acknowledged that advice firms have mechanisms in place to avoid bias that could be attributed to commission.
“While the regulator has said they will investigate these mechanisms in more detail, it’s good to see the regulator listening and learning from processes adviser already have in place.”
Andrew Gething, managing director of MorganAsh:
“The FCA’s market review looks set to address many of the known harms the sector has been aware of for a long time.
“As expected, commission remains a hot topic – as we have seen in the car finance sector. Consumer groups have long cited commission bias as a cause of consumer harm.
“While the industry argument that the protection gap would widen without commission does have merit – particularly for less exciting products like life insurance – it’s up to firms to evidence in their outcome reporting that any detrimental impact of commission bias is minimal and/or reducing, especially for vulnerable cohorts.
“The sector is responsible for many good outcomes and the FCA recognises this in its updated terms of reference. However, these products are most needed when clients are at their most vulnerable.
“With the FCA’s recent vulnerability review identifying that many firms are still unable to monitor or take action on outcomes for this cohort, the sector needs to demonstrate that is looking beyond just those who claim and is alive to the challenge for all customers.
“Across all areas – particularly customer vulnerability management – robust data is absolutely critical and the best defence in meeting the regulator’s requirements – particularly Consumer Duty.
“With quality management information, firms will hopefully be able to demonstrate that any poor outcomes that are identified in the review are at least low or shrinking.”
