The Financial Conduct Authority’s consumer duty will present a "seismic" shift in the way protection firms will do business, according to industry veteran Johnny Timpson.
The rules, which come into force next year, will act in conjunction with vulnerable customer guidance, fair value regulation, and the regulator’s changes to the appointed representatives regime, which include a tighter control of AR firms.
They will place a clear onus on firms to “act to deliver good outcomes for retail clients” and, crucially, will apply from the initial prospect stage, not from when the client enters a client relationship with the adviser.
For protection advisers and providers alike, the rules will dictate a closer ongoing relationship with the client, as well as an acute awareness of their needs, said Timpson.
But there could be an opportunity for advisers as advice should play a greater part in the way customers go about their protection needs.
“The consumer duty is a seismic piece of change - it really is,” said Timpson. “The regulator, and it's not just the regulator, because the drive for improved standards is coming from parliament, is seeking to raise standards right across the financial services industry.
“I’ve been in this industry for 40 years. This is the biggest piece of regulatory change in at least the last 20."
He said advisers will be required to demonstrate they understand their target market, and that the products and services they are recommending are appropriate.
The rules are the biggest piece of regulatory change in the last 20 years, says Johnny Timpson
The first clues will be found in the underwriting, he said, and advisers should take particular care when clients are asked to disclose their health or lifestyle records.
“Start to think: is this a vulnerable customer, am I equipped to support them and, if not, should I perhaps be signposting them somewhere else?” said Timpson.
Satisfying income needs
Timpson pointed to what he called the ‘hierarchy of clients' needs’.
Most clients need to protect their income in case of death, disability, or long-term sickness, he said.
This means the benefit that's going to pay a regular income should be at the top of the hierarchy, be it life insurance, income protection or critical illness cover.
He said: “Pay attention to the hierarchy of need. You have to basically challenge yourself: 'is what I'm doing delivering value to my customer now?'”
With that in mind, Timpson said commutation of ongoing income to lump sums, such as with family income benefits, should be an advised activity, similar to pension transfers, where sums greater than £30,000 require financial advice.
"Because the initial family income benefit policy was recommended for a reason to replace income, a life office should not be trying to commute the claim from regular income replacement payments to lump sum payment without the advice recommendation.
“It's debatable as to whether or not that happens all the time. But certainly, my expectation is that the life office claims team should be signposting the claimant family back to the financial adviser", he explained.