The Financial Conduct Authority’s (FCA) failure to explicitly ban loaded premiums under its Consumer Duty means the pressure is on insurers and distributors to justify continuing the controversial practice, according to St James’ Place divisional director Tony Müdd.
Müdd said the issue was “bordering on a stain on our industry” and argued that despite not being explicitly outlawed, conditions within the Consumer Duty meant firms should stop inflating premiums purely for commission.
Unveiling its flagship project, the FCA told Health & Protection the duty does not explicitly prohibit the controversial practice of loaded premiums, whereby premium rates are inflated to pay distributors and advisers higher commission.
In April, Müdd warned the duty as consulted on didi not give any “wriggle room” for firms who thought loaded premiums were acceptable.
He was backed by protection industry experts including Johnny Timpson, who is a member of the Financial Services Consumer Panel and Financial Inclusion Commission, and Alan Knowles, managing director at Cura Financial Services and member of the Income Protection Task Force.
‘Stain on our industry’
Speaking to Health & Protection, Müdd (pictured) said the regulator’s move was not surprising given previous responses during its consultation and that its take was also consistent with the concept of the principles based approach upon which the duty is centred.
Müdd said he failed to see how the practice, which is “bordering on a stain on our industry” could possibly continue, not just morally but importantly under the over arching new consumer principle that “a firm must act to deliver good outcomes for retail customers”.
He added it was therefore up to both distributors and insurers to decide whether it was possible to interpret the Consumer Duty in a way that allowed loaded premiums.
“How can it fit with two of the three cross-cutting rules which under pin the new consumer principle to ‘act in good faith towards retail customers’ and ‘avoid foreseeable harm’?” Müdd asked.
“Remember this is a practice where the consumer pays a higher premium for protection, the most basic financial product that is the foundations for an individual and their families financial wellbeing for no additional benefit just to enable the adviser to receive a higher level of commission.
“It should also not be forgotten that the ‘four outcomes’ which are designed to deliver the cross-cutting rules include price and value and consumer understanding.”
Müdd added that when it comes to price and value the FCA made clear that firms must act in good faith.
“They must not knowingly or unknowingly sell products that do not offer value to consumers,” he continued.
“While fair value is more than just about price, how can it be fair that for a lower price the consumer can get exactly the same product from an adviser not electing to take higher commissions. Perhaps just as importantly how can manufacturers even permit this under their own obligations.
“On consumer understanding, manufacturers and distributors are required to help consumers make informed decisions.
“On the basis clients are never informed they are being sold products with loaded premiums I again fail to see how this practise can survive.”
‘Extremly difficult to justify’
Alan Lakey, director at CI Expert and advice firm Highclere Financial Services, echoed Müdd’s sentiments.
“It is difficult to see justification for loaded premiums unless the firm is able to clearly show additional and valuable benefits that they have added for the policyholder’s good,” Lakey told Health & Protection.
“It seems to me that under the Consumer Duty obligations it would prove extremely difficult to justify loaded premiums without worthwhile added value.”
Andrew Wilkinson, director at Moneysworth, added he had concerns around customers paying a higher premium than normal because an insurer and distributor agreed to pay higher commission.
“This issue has been previously identified as something which needed to change within the industry,” Wilkinson said.
