On 28 August, the Financial Conduct Authority published the Terms of Reference (ToR) for its Pure Protection Market Study, in which it explained the rationale for the study, its intended scope and the areas the FCA planned to explore.
The press release stated that the regulator intended to “launch the market study into how pure protection insurance products are sold, following concerns that competition is not working well in the market”.
No start date has been announced; only an intention to launch the study in the 2024/25 financial year, although views on the scope of the ToR must be returned by 11 October.
Welcome step
This deep dive into the protection market is a first by any of the financial regulators.
It will focus on retail consumers, where pure protection products are designed to help an individual and/or their dependents with existing financial commitments or lifestyle adaptations if the policyholder dies or becomes incapacitated, injured or ill.
The breadth of the study will give any adviser the opportunity to demonstrate the value they offer families and the UK economy
These products include term assurance, critical-illness cover, income protection insurance and whole-of-life insurance.
In the ToR, sections 1.3 to 1.6 of the Introduction suggest that the review links to wider work on the Consumer Duty.
Within this market, the main distribution channel is via intermediaries. This is a cost-effective way for an insurer to reach consumers, and intermediaries can provide expertise and access to the market. The study will seek to understand whether the market is functioning well and if consumers are receiving good outcomes.
Search for evidence
The FCA will look for consistent evidence as to “where markets work well in the interests of consumers, where consumers are able to buy products and services which meet their needs and provide fair value, sold to consumers in a way that is clear, fair and not misleading”.
The FCA wants to determine if distribution arrangements for pure protection products are consistent with providing fair value
This will require insurers and distributors to evidence the fair-value requirements under the Consumer Duty and PROD 4 rules in respect of each part of the distribution chain for protection sales.
The FCA has been specific about where the market may not be functioning well and competition may be lacking, harming outcomes for consumers. It says:
- The design of commission arrangements may not always deliver fair value;
- Some pure protection products may not provide fair value to customers; and
- Competition may be weakening due to the recent exit of several insurers.
Consumer awareness of advice
Demonstrating that the customer is aware of the advice (or non-advised) regime the intermediary is operating in, and the level of post-sale security, is important.
The review links to wider work on the Consumer Duty
The market currently supports many operating models, but most protection sales are linked to indemnity commission payments, an upfront payment. This reflects the fact that most costs relate to the client acquisition, research and advice, underwriting and policy issue phase of any contract.
The FCA will look at the way customers are found by different distributors and assess the value of revenues and cost of acquisition. It wants to determine if distribution arrangements for pure protection products are consistent with providing fair value.
Competition and outcomes
The FCA states the issues it intends to explore and the crux of this ToR in Chapter 5.
It will seek to understand how well competition is working and customer outcomes including price, quality and alignment with their needs.
The study will focus on retail consumers
Although analysis and conclusions will be driven by the evidence, it is looking at the outcomes using four broad themes:
- Consumer needs, engagement and understanding;
- Competitive constraints on insurers and intermediaries;
- Commission incentives and potential conflicts of interest; and
- Firms’ behaviour and practices.
The breadth of the study will give any adviser the opportunity to demonstrate the value they offer families and the UK economy when recommending protection products. The process is under way and the FCA is engaging with market participants.
This short summary provides busy mortgage brokers who advise on protection with an essential overview of the FCA’s announcement.
You can read the full proposed ToR on the regulator’s website.
Neil McCarthy is Chair of the Protection Distributors Group
This article featured in the October 2024 edition of Mortgage Strategy.
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