The FCA has launched a Market Study into the distribution of pure protection products, which could see significant changes for insurers and intermediaries.

The primary focus is commission arrangements, whether they affect the product’s value or design, and whether market competition works well. At present, in the protection market, there is no requirement to disclose the value of the commission payment or how it impacts the premium paid.

The good news for the sector is that the Market Study is forward-looking, and the objective is not to evaluate past conduct or the need for redress. However, the study could result in significant future change, and its importance should not be overlooked.

With a fresh focus on the Consumer Duty and PROD rules, the FCA is set to determine if firms are distributing products and services that meet the needs of retail customers, and if they provide fair value. The Market Study should cover some specific areas of concern in conduct of business risks.

It’s critical to realise that consumers rely on pure protection products when they are at their most vulnerable.

The FCA has identified good outcomes in the market that include improved accessibility to cover for a wider range of medical conditions, favourable pricing compared to markets in other countries, and high ratios of claim payouts.

The issues that the Market Study spotlights are not new. Firms should already be able to evidence that they have measures in place to identify and effectively control the risks of poor customer outcomes, such as:

• Unnecessary switching of products (churning)
• Commission models driving unsuitable product sales and increasing premiums
• Conflicts of interest in commission models impacting competition
• Customers not being fully informed of the options available to them and being routed to products that don’t best meet their needs or provide good value
• Complexity of the distribution chain

Commission models under pressure

With the backdrop of the pending motor finance commission Supreme Court decision, there is an apparent concern about what this may mean for other sectors and products that rely on commission-based models.

Even where ICOBS disclosure rules are met in full, there can still be an imbalance of knowledge between the customer and insurer/intermediary in terms of understanding what the protection needs and the implications are, the options available, and what is a reasonable cost for the product or service.

For example, lead generation and targeted marketing strategies can target customers for non-advised services by promoting the lowest premium options, while these customers are more likely to be vulnerable and could most benefit from advice.

The regulator is also reviewing the drivers of unreasonably high premiums in terms of commission models and panel arrangements. Most distribution arrangements are on an indemnity basis and, despite controls such as clawback for sales lapses, can drive unsuitable sales and unnecessary repeated re-broking. Insurer panels are under further scrutiny due to the conflicts in incentives they create, their impact on product innovation and customer choice, and limiting access to markets by smaller insurers.

Focus on vulnerable customers 

The FCA is reviewing how the market works for vulnerable customers’ access to protection products, as those with health conditions may struggle to access affordable cover. More generally, the regulator is reviewing the fair value of cover in terms of the cost of protection versus the cover provided, particularly in the low-value market.

This ties in with the FCA’s recent review of the fair treatment of vulnerable customers, which sets out good practice and areas for improvement.

Proactive strategy for delivering fair value and good outcomes

TCC regulatory experts outline a six-step strategy for firms that want to get the distribution of pure protection products right:

1. Be proactive. Take action now.
2. Review your product governance design and distribution strategy: Are your customers able to access the products and services that meet their needs? Is the distribution strategy resulting in good outcomes for customers buying the right products to meet their needs, whether advised or non-advised?
3. Evaluate incentive schemes: Are your incentives driving the right outcomes? For example, could the sales incentive be encouraging unnecessary switching?
4. Revisit your fair value assessment: Is your fair value assessment working well for your customers, or is it distorting product price or consumer choice? Are all customers receiving fair value, including the vulnerable?
5. Review your communication strategy: Are your customers getting the right information at the right time to make informed decisions?
6. Assess your MI: Are you using your MI to test for good customer outcomes throughout the customer lifecycle? Are you using any new MI? Have you compared the outcomes for different customer cohorts, customers using different distribution channels, or customers with different needs and vulnerabilities?

Impartial advice and compliance support

For over two decades, TCC’s experts have assisted financial services firms in navigating their compliance challenges and successfully meeting regulatory outcomes. Our teams of trusted experts offer one-stop, bespoke compliance solutions to tackle your regulatory challenges:

• An unbiased review and strategic advice
• Pragmatic, value-driven outsourcing for any size of projects
• Strategic resourcing of perfectly matched, highly-skilled interim resource, when and where you need them