The Financial Conduct Authority (FCA) has issued a stark warning to protection insurers about “poor selling practices” and slow restorative action and is demanding better due diligence of new advisers.
The regulator highlighted that commission structures were “a potential driver of poor outcomes” and told insurers to avoid “the unnecessary re-broking of policies”.
The statement came in a scathing letter to life insurer CEOs from FCA director of insurance Matt Brewis which outlined the regulator’s priorities and ongoing work in the insurance market.
It particularly highlighted the importance of putting consumers’ needs first around the suitability and value of life protection products.
“We continue to see evidence of poor selling practices of protection products,” Brewis said.
“While our data provided evidence of insurers taking appropriate actions in response to intelligence about poor broker conduct and remediating customers, we consider that insurers could often have acted sooner.
“We also want to see firms improve their due diligence on new brokers to avoid their products being sold to customers for whom they will not pay out as expected, and to avoid the unnecessary re-broking of policies.”
Brewis emphasised that where insurers identify the potential for customer loss in the policies they hold, the FCA expects them to remediate customers appropriately and promptly, and flagged commission as a key issue.
“A potential driver of poor outcomes is the commission structures between insurers and brokers,” he continued.
“We expect firms to perform thorough assessments of their products and distribution models to ensure they offer fair value, in line with PROD 4 and Consumer Duty expectations.
“Insurers should monitor brokers in their distribution channels to identify instances where either unsuitable products may be sold, or products do not offer fair value.”
Commission may incentivise product churn
The FCA said it engaged with providers this year to understand how their controls manage the risks of poor selling practices within distribution channels.
It is also continuing the thematic review of implementation of PROD 4 rules testing whether protection products are delivering fair value to customers, including the level of commission structures.
“We continue to engage with insurers to identify where there may be evidence of poor outcomes,” it said.
“We are also concerned that levels of commission may not always be consistent with fair value and may incentivise unnecessary product churn.”
Poor customer service
Poor consumer support and service quality was also identified as a critical concern by the regulator, with claim settlement times and insurers’ internal target metrics being cited.
“We have seen plenty of evidence in recent years of poor service being delivered to life insurance customers,” it said.
“This includes slow transfer and claim settlement times, as well as lengthy response times, and we expect firms to address this as a matter of urgency.
“We are also concerned about potentially poor service standard targets life insurers set themselves.”
The FCA added it expects to see firms “raising the overall standard of their service to ensure good outcomes for their customers” and noted that it aims to understand the drivers of inadequate service where it arises.
It continued: “Where we identify firms that are not acting to deliver good customer outcomes or have inadequate processes in place to avoid causing foreseeable harms, we will intervene using our regulatory tools.
“More broadly, we will collect data in targeted areas to understand how life insurers’ actual service standards compare with intended standards and how customer experience differs across a range of factors and between firms.”
Reviewable whole of life
The regulator singled out reviewable whole of life policies for particular concern, noting it had seen evidence these products were not delivering good outcomes for customers.
It has also seen premiums increasing substantially at review points, leaving customers to either pay the increased premium or reduce the level of pay-out their beneficiaries would receive on their death.
“Firms should already be able to demonstrate they are taking active steps to identify and rectify the causes of poor outcomes for customers,” Brewis said.
“In guidance published in 2016 we set expectations for firms to periodically review their closed book products, to check they remain fit for purpose and continue to meet the general needs and reasonable expectations of the customers they were designed for, taking account of changing economic conditions.
“Building on this with the PROD 4 rules and the Consumer Duty, insurers should make sure that products remain suitable for customers’ needs, offer fair value on an ongoing basis, and that clear and timely communications to customers detail the nature of the product and any changes.”
Two years of warnings
Commission has been a major issue over the last two years since the FCA launched its product value rules and announced the introduction of the Consumer Duty.
The regulator has repeatedly warned firms about the potential for commission levels to skew industry practice and hurt consumers.
In August 2021 the FCA flagged commission as a key target within assessing product value. In May 2022 it pressured insurers to again consider adviser commission levels as part of their Consumer Duty implementation.
Three months later it told insurers that it expects them to tell advisers and distributors how their commission affects the value of the product for consumers.
Advisers and other industry leaders have also raised concerns, particularly around loaded premiums which provide a higher commission to the intermediary.
Cura Financial Services managing director Alan Knowles and industry veteran Johnny Timpson said they believed loaded premiums were incompatible with the new rules.
This was echoed by St James’ Place divisional director Tony Müdd who said the issue was “bordering on a stain on the industry”.
And in December Assured Futures commercial director Ian Sawyer said commission models in the protection industry were “ridiculous” and incentivised poor behaviour.
Earlier this year Aviva managing director of protection Fran Bruce told Health & Protection it was bringing firms with loaded premiums “back into line”.
Legal & General Retail managing director for distribution Ali Crossley added the insurer had not told any firms they must reduce, or end loaded premiums, but said it had declined deals where it thought the commission level was too high.
This summer, Guardian CEO Katya MacLean told Health & Protection the insurer had not chosen to end any relationships with its distribution network for this reason.
And last year Lloyds Banking Group protection director Rose St Louis, who leads the Scottish Widows protection business, said she was having conversations about the issue and deciding what panels the insurer wanted to participate in.
Other themes identified by the regulator for either the whole insurance industry or the life insurance sector specifically included:
- Embedding the Consumer Duty
- Improving oversight of appointed representatives
- Minimising the impact of operational disruptions and the effectiveness of outsourcing oversight
- Supporting customers in financial difficulty
- Effective customer journeys
- ESG and sustainability-related investments and disclosures
- ESG and governance and culture
- Operational resilience and the increasing reliance on third parties