Two highly respected figures within the protection market have told Health & Protection they believe the use of loaded premiums does not meet the Financial Conduct Authority’s (FCA) Fair Value and proposed Consumer Duty rules.
The contentious practice – where premium rates are inflated to pay distributors and advisers higher commission – was brought up as a topic of discussion at this week’s Protection Review conference.
Johnny Timpson, who is a member of the Financial Services Consumer Panel and Financial Inclusion Commission, told Health & Protection he has an issue with loaded premiums and resulting increased commission within the same distribution channel.
“This practice exacerbates the poverty premium issue that we already see in the UK with invariably those on lower incomes and/or lacking financial capability paying more to access cover,” Timpson said.
“I frankly fail to see how this practice meets the acting in customer best interest obligation that firms currently have, let alone FCA fair value and proposed Consumer Duty requirements – especially where the distributor firm’s sales process is non-advised, the consumer not being made aware of the loaded premium nor the fact that the same cover, from the same provider, is available from other firms at lower cost.”
Ethics of loaded premiums
Consequently, Timpson called on firms across the sector to think about the ethics of engaging in the use of loaded premiums.
“With consumer trust an issue within the insurance sector as it stands, I suggest the accountable and responsible managers within firms think long and hard about the ethics of loaded premiums to increase commissions, the real value being exchanged and its transparency,” he continued.
“Plus, importantly, how they would feel if their wife, mother or daughter had to pay a loaded premium simply to generate an increased commission and how they would respond to a challenge via consumer media, groups and regulator.”
Very hard to justify loaded premiums
Alan Knowles, managing director at Cura Financial Services and member of the Income Protection Task Force, told Health & Protection that regardless of the rights and wrongs of loaded premiums, their use could fall foul of FCA fair pricing guidance.
“Regardless of your thoughts on whether it’s right or wrong, under fair pricing guidance which the FCA has put together, it does actually state in there that intermediaries need to be able to justify their commission,” Knowles said.
“There’s a specific statement in there which actually talks about charging more to a customer where it is leading to them not getting fair value and that’s in the new rules that have been introduced due to the PS21-5 policy statement.
“My thoughts on this is under the fair value rules that the FCA have put in place, I think it’s going to be very hard for firms operating on loaded premiums to justify that their customers are getting fair value in terms of the extra commission and the extra premium that’s being charged for them.”