New FCA rules are 'seismic change' for protection industry

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New FCA rules are 'seismic change' for protection industry
Isaque Pereira from PexelsThe FCA's consumer duty will force the protection industry to change

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.

"I’ve been in this industry for 40 years. I certainly think this is the biggest piece of regulatory change in at least the last 20," says Johnny Timpson

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.

Loaded premiums

Timpson has worked in the financial services industry for 40 years, 30 of which he spent at Scottish Widows, most recently as its head of financial protection, technical and industry affairs.

He left the provider last year to become a consultant and sits on the FCA's Financial Services Consumer Panel.

Timpson has held a number of public office, industry and charity sector roles, most notably Cabinet Office Disability and Access Ambassador for both the insurance and banking sectors; Prime Ministers' Champion Group member for dementia communities; and founder and chairperson of the Access To Insurance Working Group.

Alongside other industry experts, Timpson has been vocal about the perceived unfairness in loaded premiums, which he believes could be stamped out by the consumer duty and its requirement that products must deliver value.

 

Timpson: Commutation of income to a lump sum should be advised

Loaded premiums are an additional percentage fee charged on the sum assured in a mortgage protection policy by the insurer each month. 

This percentage fee is distributed to a number of stakeholders, including the re-insurer, insurer, network, and the appointed representative firm or adviser - on top of their commission or fee.

But advisers have hit out against the practice in the past, questioning the rationale often cited by providers that the extra cost reflected added value.

Timpson said: “I actually think [loaded premiums] are unethical. I think it'd be difficult to justify that presents some real value, particularly where you or your firm are not actually giving advice to your customer.”

Stacy Reeve, senior policy adviser at the Association of Mortgage Intermediaries, agreed. She said: “It will be harder to justify loaded premiums under the consumer duty.

Advice firms will need to review their advice process and how, and at what point, protection products are raised.Reeve

"Intermediary firms should already be assessing as part of fair value whether the remuneration they receive on protection and general insurance products bears a reasonable relationship to their firm’s actual costs, their level of involvement, or the benefit added by them as part of distribution of the product.

"The consumer duty will add another layer on this. I expect firms to be challenged on loaded premiums, both from an internal viewpoint and by product providers who are undertaking their own value assessments."

Protection products, and whether they are advised or not, will require clear disclosure under the consumer duty rules, said Timpson.

This will be particularly important when the underwriting is non-standard, as not only is the client more likely to be vulnerable, they might also feel uncomfortable asking for an explanation.

"Consumer duty basically requires us to go to greater effort to ensure that our customers understand our products and services. So where the decision is non standard, it's important that you explain the rationale for that non standard decision," he added.

Equally, when setting up a policy deemed better for the client, such as two individuals having individual rather than joint policies, it will be paramount to document the rationale for that. 

Ongoing advice

Under the consumer duty, advisers and providers will have to ensure they work together to provide an ongoing service to the client, Timpson said.

This will involve providers notifying the advisers if payments have been missed or policies terminated or changed.

Given the current squeeze on household incomes, this could be a more prominent issue in the months to come, he suggested.

“If a consumer directly makes a request to either cancel a policy, or change the policy, so reducing the amount of the amount of cover, that basically is a trigger, an indication of a potential vulnerability. 

“At that point, not only should the life office be instituting the vulnerable customer protocols, but the intermediary should be as well. Someone needs to contact the client to find out why.”

We get the regulation that we deserve. Treating customers fairly has not worked as well as it was intended to do.Timpson

He added: “Some providers are very good, and they will do that. But others will probably leave or wait until maybe two or three premiums have been missed, or they may not yet actually advise the adviser at all. 

“And if that's the case, we have the risk of the consumer losing the benefit of cover. And the adviser being unaware that that consumer may well be potentially vulnerable.”

Overall, insurers and advisers should do more to keep consumers regularly advised about the policies they have and why they have them, what they can do to alter them, or claim on them, Timpson said.

Things like annual benefits statements should become the norm, he said, particularly given the requirements of the consumer duty to ensure that customers understand the product, its features and what they can do with it, throughout the product’s lifetime.

Wherever the adviser can’t help the client, they should be signposting them to those that can, as well as support services.

“Support services are a feature now of every provider's proposition, but they are under-used. 

“Given the focus on better supporting vulnerable customers, and the higher standards required by the consumer duty, we have to do far more to make sure that consumers are made aware and kept aware of the support services available to them, because they are paying for them.”

AMI's Reeve said the rules were about "empowering consumers to make good choices" and suggested advisers might have to adapt their processes to meet the new requirements.

"Advice firms will need to review their advice process and how, and at what point, protection products are raised.

"For example, if we know a customer has an X per cent chance of being off work due to illness or sickness, could it be argued that this was foreseeable and have we failed to deliver good consumer outcomes if we don’t discuss income protection or give it enough attention and focus as part of the advice process?"

While the consumer duty presented big challenges for providers, advisers and product design alike, Timpson said the rules were overdue.

"We get the regulation that we deserve. And, looking at some of the things that have been happening in the marketplace in recent years, treating customers fairly has not worked as well as it was intended to do. So it’s actually welcome.”

carmen.reichman@ft.com