The protection insurance sector is currently on tenterhooks awaiting the findings of the Financial Conduct Authority’s (FCA) review into the pure protection market.
For some industry commentators the review is “long overdue” in a market operating with too few providers and where rogue lead generators are at large and high commission is leading to lower value for some customers.
And while the thorny issue of commission structures is one of the key areas the regulator is looking into as part of the review, the jury is still out over whether a ban will be necessary across the sector.
Commission, while imperfect, appears to be the preferred option over fees charged for advisers’ services.
But what is certainly clear is that the regulator needs to tread carefully as the dangers of getting this wrong are only too evident from the example of the Australian market.
Pure protection market review
In August last year, the FCA revealed it will be conducting a review into the operation of the pure protection market including commission structures such as loaded commission and the shrinking insurer market.
In the wake of receipt of the regulator’s findings, Tim Hogg, director at consumer group Fairer Finance, told Health & Protection the study is long overdue as there are important issues to investigate in these markets.
“On the one hand, market failures are leading to harm for existing customers, while on the other hand, under-insurance means that far too many people are not protected at all,” Hogg explains.
Right to look at commissions
In terms of potential market failures, Jennifer Gilchrist, protection specialist at Royal London, maintains the FCA is right to be looking at commission in particular.
“We are already working closely with the FCA in advocating for a more thoughtful review of commission, understanding the fact that these are financial products that are sold, not bought,” Gilchrist says.
“We don’t want to worsen the protection gap,” she adds. “Equally, there is scope for commissions to become excessive, or to skew product sales, and the regulator is right to look at this whole area and try to strike a balance.”
Loaded premiums
But a possible ban of loaded premiums where premium rates are inflated to pay distributors and advisers higher commission, have long been a hot topic for the industry.
And according to David Hollingworth, associate director, communications at L&C Mortgages, they are likely to be under scrutiny within this review.
“This looks an area that could well see the regulator looking hard for some kind of justification,” Hollingworth says.
“At the very least it would look like an area where more transparency will be expected and could ultimately be a practice that is finally set to be banned.”
Not disclosed up front
A key issue with commissions for compliance consultant Branko Bjelobaba, is that they are generally not disclosed up front.
“Intermediaries have to tell the customer the nature and source of their earnings and customers can ask for the exact amount,” Bjelobaba explains.
“Intermediaries act as agent of the customer and secret profits can’t be made. Personally with what has been happening with motor dealer finance, I think the days of hidden commissions are coming to an end and transparency should prevail – why hide it?
“Over the years I have presented at many events in front of private medical insurance (PMI) and protection product intermediaries and have many people ask what’s wrong with earning as much commission as is possible?
“Quite a bit.
“Take for example a recent quote I had for term life cover; an hour of non-advised sales is surely not worth £6,793 with nothing to do for the term once the policy kicks off?
“Also with PMI, the commission is very loaded at the start and then drops off, but intermediaries still have a lot of work to do at every renewal – is that still fair?”
Not in a good place
But in any market firms have to make a profit for them to prove sustainable.
And according to Alan Lakey, director at Highclere Financial Services, the protection market is not in a “good place”.
“We have two firms representing over 50% of the entire market and it is no surprise that we continually see insurers pulling out to concentrate on more profitable ventures,” he adds.
Meanwhile Peter Hamilton, head of market engagement at Zurich, expresses hopes the FCA will look the role that lead generators play.
“There are too many rogue outfits misrepresenting their identity, encouraging inappropriate re-broking of good policies,” Hamilton says.
“How can we share more readily examples of poor practice and poor practitioners?”
Addressing under-insurance
The general feeling across the industry is that clear commissions have a role to play in the appropriate broking of good policies.
And according to Hogg, in theory, commission payments help address under-insurance – as they incentivise distributors to reach new customers.
“However, the competitive dynamics have led to intermediaries sometimes receiving what appear to be high commissions, resulting in lower value products for consumers,” he adds.
“It’s important to assess whether the current level and structure of commission payments are in the customer’s best interests.”
So there is balance to be struck. And the danger of not finding this balance was an area discussed by Protection Guru founder Ian McKenna, last October.
McKenna warned the upcoming review of the pure protection market could be “devastating” if it is too overly focused on commission and fails to learn lessons from the experiences of other countries – particularly Australia.
How would advisers get paid?
His sentiments are echoed by Naomi Greatorex, managing director at Heath Protection Solutions.
“I definitely agree with Ian’s comments,” Greatorex tells Health & Protection.
“The worry is that if you look at the market and consumers, how else would protection advisers get paid?
“So would we charge a fee? And if you charged a fee, how would that work?
“When we talk to clients, when we explain how we get paid, the consensus always is that clients are happy with that.
“Because they understand how we’re getting paid, but also that it is not going to physically cost them any money upfront.”
Alert to changes in Australia
Hamilton maintains the FCA is very alert to the impact that commission changes have had in Australia.
“There may be some changes to how the model in the UK works,” he adds.
“The key will be ensuring a balance that means customers are seen to get fair value for their premiums, distributors are appropriately rewarded for their efforts and that insurer margins sustain a vibrant, innovative and competitive market.”
Hilary Banks, commercial director at Guardian, says: “There are often lessons that we can learn from other geographies. Australia is an example with its superannuation structure and compulsion.
“However, we must remember that the economic and legislative structure of such territories is different – thus preventing a direct read across.”
However, Joanna Streames, owner of Velvet Mortgage Insure Services, warns the regulator against moving too quickly.
“The FCA’s scrutiny on commission is not unexpected, but moving too quickly – or going too far, could have serious consequences,” Streames says.
“We have seen the impact of overregulation in other areas of financial services, and a hasty approach here could risk reduicng access to advice when it is more needed than ever and the gaps are already a huge concern.”
Over 50s life commissions ban
So perhaps there is a middle way where some commissions are banned and others are left untouched. It’s a scenario Hogg thinks could happen.
“It’s unlikely that the FCA will seriously consider banning commission for term life insurance, critical illness, and income protection products,” Hogg says.
“However, the FCA may ban commission for over-50s plans, to bring the regulation of over-50s plans in line with funeral plans. A ban on commission for over-50s plans would reduce the uptake of these products.
“While over-50s plans can meet a specific customer need, we have had long-standing concerns about the design and distribution of these products. In our view, the FCA should at least consider whether a ban on commissions for over-50s plans would be beneficial for consumers.”
Full ban
And even a full ban on commissions in the protection sector is possible, warns Nadege Genetay, partner at risk and regulation constancy Sicsic Advisory.
“The protection sector may well have little choice following the FCA’s market study,” Genetay says.
“Given some of the precedents in adjacent sectors, the FCA may well go the full hog and ban commissions.
“However, the FCA will also be mindful of the protection gap in the UK, and careful not to drive a coach and horses through the industry, at a time when it is challenged about the growth agenda and its performance.
“So we don’t think the protection sector should ring out the end of commission just yet. But the sector will need to show progress on commission – both the justification of commission and cap on large sums assured – to convince the FCA not to intervene.
“We know this is already a live issue for many firms following the FCA’s intervention on product governance and fair value.”
Retail Distribution Review
But let us not forget that the sector has been here before when commissions were raised amid the implementation of the Retail Distribution Review (RDR).
“When the regulator last reviewed commission, which was around the implementation of the RDR, a key factor was the realisation that removing commission for pure protection would impact all forms of distribution, not just advice,” Protection Review chief executive Kevin Carr says.
“While a fee only approach could be better in some situations, the removal of commission would not only remove access to protection insurance for most people – it could also create an unfair playing field in terms of fees where those with medical conditions, large amounts of cover or complex needs would be looking at significantly higher fees than others.”
While there are lessons to be learned from history – both in the form of the RDR and Australia, the clear message from the industry to the regulator is to tread carefully and strike a balance.
Alan Waddington, distribution director at Cirencester Friendly Society, adds: “Regulation is vital to ensure our industry is safe and can be trusted by the public. It’s easy to forget mis-selling scandals of the past but regulation has prevented many more.
“A balance is important, and regulation should not stifle innovation and creativity, rather it should encourage and welcome it.”
