The Financial Conduct Authority (FCA) has told insurers they should be examining the amount of commission paid as part of the distribution process when complying with the incoming Consumer Duty.
The issue was one of several key questions raised by the regulator that the financial services sector should be asking when preparing itself for the new rules.
Speaking at the Association of British Insurers (ABI) Achieving good outcomes under the Consumer Duty webinar, FCA director of insurance Matt Brewis highlighted the approach insurers should be taking in prioritising customers throughout the process.
“It will be incumbent on firms to take a step back and consider what more can be done to help consumers navigate information and support those good outcomes,” he said.
“We want products to be sold that have the customer at the heart of the product, from the point at which they are designed to the way they are sold.”
Brewis then singled out some key questions the regulator “would expect [insurers] to be asking when designing a product” in terms of the duty. They were:
- Does the product have a defined market? Who are you selling too?
- Does the cost of the product reflect the cost of the risk being underwritten?
- How much of the premium being charged is used to pay claims or received back to the customer at the end of their policy?
- How much of the premium is taken as commission through the distribution chain – either up front or across the lifetime of the product?
“These questions are at the heart of many issues in insurance. These are what we expect in product design and you to be considering,” he added.
Commission a hot topic
The future of commission has been a hot topic in relation to regulatory intervention, particularly as health and protection insurance are typically sold via commission.
Last August the FCA revealed it had forced providers to cut remuneration and extend cover after finding that protection and general insurers were not meeting its product value rules.
It also warned it was not always clear firms had adequate processes to assess whether adviser remuneration bore a reasonable relationship to the costs or workload to distribute the product.
In an interview with Health & Protection in October, Aviva protection managing director Fran Bruce admitted the insurer was “looking at where will this market evolve” and the long-term future of commission.
“When you look at the broader life and pensions market, commission was switched off from pensions with the Retail Distribution Review (RDR) what feels like a long time ago,” Bruce added.
A month later, Aviva UK Health managing director Steve Bridger noted that commission was bound to be on the FCA’s radar.
“It doesn’t mean commission is a bad thing. It’s got to be the right value and the right value for the customer, so it isn’t as prohibitive as going direct,” he said.
Furthermore, loaded premiums, where premium rates are inflated to pay distributors and advisers higher commission, have also been raised with several protection industry leaders criticising the practice and saying that the Consumer Duty “does not give wriggle room” on the matter.
However, for health insurance advisers the prospect of commission being removed is not close yet, according to compliance consultant Branko Bjelobaba.