The Financial Conduct Authority (FCA) has confirmed it will not ban loaded premiums and will not take forward “more interventionist” remedies on other areas of the pure protection market.
This includes product switching, restricted panels, guaranteed over 50s plans, auto-enrolment for protection or targeted support to close the protection gap.
The FCA’s final Pure Protection Market Study report, published this morning, includes findings on switching, claims experiences, and fair value in the protection market.
It found that generally competition works well in the market, but it has reminded firms of requirements and good practice under the Consumer Duty and its product governance rules.
However the regulator confirmed that it is not planning new market-wide measures, including on areas highlighted in its interim report published earlier this year, but will take action where firms fall short of requirements.
Auto-enrolment and targeted support
Among remedies not being taken forward at this stage are mandated protection discussions or auto‑enrolment, with the regulator considering these would be “disproportionate and could encourage a tick‑box approach”.
Another area the FCA confirmed it will not be taking forward is targeted support.
In its Interim Report, published at the start of the year, the regulator revealed it would explore whether targeted support could play a role in narrowing the protection gap.
Targeted support is a new regulatory framework that allows firms to provide suggestions designed for groups of consumers with common characteristics to help them make important decisions across their pensions and investments.
However, the regulator said it currently considered extending targeted support to pure protection would “not be proportionate” to addressing the protection gap.
It added that “the evidence suggests the main challenge is that many consumers do not engage with or recognise their potential need for protection, rather than a lack of support once they are engaged”.
However the regulator recognised that targeted support was a new regime, adding as it develops and as it evaluates the wider package of protection gap remedies, it may reconsider whether there was a role for targeted support in the protection market.
Loaded premiums
The FCA’s Interim Report suggested the regulator would not be banning loaded premiums.
This was despite previous statements from the regulator and industry sentiment that the market had been expecting the FCA to take some action on the role of commission, particularly loaded commission.
And the final report confirmed that the regulator has not changed its mind on this.
The regulator revealed that it tested if loaded premiums were associated with higher premiums by comparing policies with loaded premiums and non‑loaded premiums and concluded that, at current levels, loaded premiums were not leading to poor pricing outcomes for consumers.
Though it also emphasised that all firms must be able to demonstrate how their product provides fair value to customers in the target market as required under PROD 4.
It used policy‑level data on real transactions collected from 11 insurers involving all the policies they sold, both directly and through intermediaries, in 2024.
The regulator estimated its dataset covered 75% to 95% of all policies sold in the UK in that period.
At the market level, the FCA found that the distribution of annual premiums was similar between the loaded and non‑loaded policies, with both showing a wide range of annual premium values.
“While we found that policies with loaded premiums can be more expensive for middle‑priced products, there are almost always more expensive non‑loaded products available,“ it said.
“In isolation, a loaded premium might, therefore, be expected to be higher than a non‑loaded premium. But our empirical analysis demonstrates that, at current levels, loaded premiums do not on average result in higher premiums for customers.
“These results are consistent with commissions influencing prices through both explicit and implicit mechanisms. Loaded premiums are one possible commission structure, but the evidence does not indicate they currently result in systematically worse outcomes for consumers.
“Conversely, our findings do not rule out that there might be cases where specific premiums and commissions, including loaded premiums, fail to provide fair value,” it added.
Restricted panels
In a similar vein, the FCA said its view on restricted panels remained the same as in the interim report that currently, the practice “isn’t harmful at the market level”.
It said this reflects current levels of the practice; if panel criteria were to become more restrictive, the risk of reduced competition is likely to increase.
Again, the regulator reminded firms that under PROD 4 they must be able to demonstrate that, depending on their particular role, the product delivers fair value and that any distribution arrangements are consistent with the aim of providing fair value.
It added that products also needed to be compatible with the target market including customers’ needs, characteristics and objectives.
Product switching
The regulator also concluded that it found “insufficient harm” to justify market‑wide intervention for unnecessary switching.
It added it will continue to monitor outcomes from switching through its supervisory function as well as monitor switching in the market through its supervision of insurers and intermediaries.
The FCA further encouraged the industry to continue sharing information with it about bad actors engaging in unnecessary switching so it can take action against these firms where appropriate.
Over 50s plans
On over 50s plans, the regulator concluded that guaranteed over 50s products and funeral plans could provide fair value for customers in the target market with different preferences and objectives
It said it considered that “guaranteed acceptance over 50s products have an important place in the market, as they are an easy‑to‑access and affordable option for certain consumers, including those who may be unable to, or choose not to, access underwritten pure protection products”.
It added “this is particularly relevant in the context of the protection gap, as evidence suggests consumers with pre‑existing health conditions may find the pure protection market less accessible, which can contribute to the gap”.