Preparing for change: FCA’s review of protection product distribution and value

What happened?

The FCA’s Market Study into the distribution of pure protection products is focused on commission arrangements, and whether these affect a product’s value, design or the way competition works in the market. Currently, there is no requirement to disclose the value of commission payments or how they affect the premium paid.

The study is forward-looking: its objective is not to evaluate past conduct or determine whether redress is needed. The FCA has also acknowledged existing good outcomes in the market, including improved accessibility of cover and high claim payout ratios.

The regulator is examining known risk areas, including unnecessary switching of products, commission models that may drive unsuitable sales, conflicts of interest within commission arrangements, and the complexity of the distribution chain.

Why does it matter?

Even where existing ICOBS disclosure rules are met, an imbalance of knowledge can remain between customers and insurers or intermediaries about protection needs, available options and reasonable cost. This is particularly significant given that consumers often buy pure protection products at a vulnerable point in their lives.

The FCA is also reviewing indemnity-based distribution arrangements and insurer panels, noting that these can drive unsuitable sales or repeated re-broking, and that panel arrangements can limit market access for smaller insurers.

Who is affected?

Insurers and intermediaries involved in the distribution of pure protection products, including those using commission-based sales models, panel arrangements, lead generation or non-advised sales channels.

Key risks

• Commission structures that may drive unsuitable product sales or unnecessary switching.
• Lead generation and marketing practices that route vulnerable customers towards the lowest-premium, non-advised options.
• Insurer panel arrangements that limit competition or restrict access for smaller insurers.
• Fair value assessments that do not adequately reflect the needs of vulnerable customers.

Actions to take

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

• Be proactive. Take action now.
• 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?
• Evaluate incentive schemes: Are your incentives driving the right outcomes? For example, could the sales incentive be encouraging unnecessary switching?
• 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?
• Review your communication strategy: Are your customers getting the right information at the right time to make informed decisions?
• 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?

Wider implications

The Market Study follows the pending motor finance commission Supreme Court decision, which has raised broader questions about commission-based distribution models across financial services. Firms in the protection market should expect continued scrutiny of commission structures and panel arrangements as a result.

Recommendations

Firms should treat the Market Study as an opportunity to review their distribution arrangements proactively, ahead of any formal findings, rather than waiting for the FCA to identify specific concerns. The six-step strategy set out above offers a practical starting point.