The Financial Conduct Authority (FCA) needs to recognise the need for flexibility in commission in its market study.
This is according to industry experts following the release of the terms of reference of the regulator’s market study – who also backed its emphasis on exploring more innovation in the protection market as well as its intention to not look at fair value in isolation.
Need for flexibility in commission
Jamie Jenkins, director of policy at Royal London, said the study has created 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,” Jenkins said.
“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 common-sense 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.”
Commission payments hurting consumers
Tim Hogg, director at consumer group Fairer Finance, maintained pure protection markets could be working better for consumers.
“The design and size of some commission payments appear to be hurting – rather than helping consumers,” Hogg said.
“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.”
David Gray, senior consultant actuary at Broadstone, said that while the FCA has pointed 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,'” Gray continued.
“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.”
Opportunity for change and innovation
Ian McKenna founder and CEO of Protection Guru, said it was 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,” McKenna said.
“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.”
McKenna added it was 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,” he concluded.
