Advisers charging cancellation fees for pure protection products are rarely ever doing it in the best interests of their client and more often than not the fees are the result of bad advice, according to one IFA.
Joanna Streames, managing director of Velvet Mortgage & Insure Services, told FTAdviser about one incident where a client came to her after their husband had been “hard sold” into a life insurance product.
The husband had a three-year-old policy with Aviva. When he called the advice firm to try and cancel the policy because he was buying a house with his wife, the adviser told him he should take out a new policy in its place on the spot with LV.
When his wife found out about the new policy, she contacted Streames. After reviewing the policy he had taken out with Streames, the couple decided it was not right for them.
Particularly seeing as the wife had no policy in place herself, it made more sense to consider joint cover.
They tried to cancel the policy, but because it was after a 30-day period, the advice firm could charge him a cancellation fee.
In emails seen by FTAdviser, the firm requested a fee of £250.
He was told he could set up a payment plan to pay the fee for an insurance policy which would no longer provide him with any cover.
The client said at no point was he made aware of the cancellation window, or had any memory of signing documents with this term in there.
He alleged the adviser on the phone said, because he’d been with the provider since 2019, there was in fact no cancellation fee.
Their solution to clawback was to set up a new policy in place of the old one - effectively selling over it.Joanna Streames, Velvet Mortgage & Insure ServicesHearing this, Streames promised the couple she would cover the fee herself if she could not get it voided. After sending an email to the advice firm using the Financial Conduct Authority’s complaints procedure, she said the company “immediately backed down”.
“The thing is, clients don't always understand these matters and even if they did sign something, it's bad practice,” said Streames.
The Financial Conduct Authority does allow advisers to charge a cancellation fee after a 30-day period for pure protection products.
Any cancellation requested within 30 days cannot incur a cancellation fee.
It says the fee must not exceed the value of services already provided - i.e. the advice, and must not be construed as a penalty. It cannot be charged if the client was not “duly informed” about the amount payable - which, in this case, they say they were not.
There is, however, some confusion around the exact rules on cancellation fees for pure protection products.
After speaking to a handful of advisers, FTAdviser found each firm’s compliance company had a different stance on them.
Some said it was fine to charge them, while others had been advised by compliance officers to steer clear of them completely.
Elsewhere in the FCA’s handbook, it said: “A consumer cannot be required to pay any amount when exercising the right to cancel a pure protection product.”
The FCA told FTAdviser the “right to cancel” refers to the 30-day window, whereas it seems some advisers have interpreted this as covering any period.
In Streames’ client’s case, she said a bad business model was in operation. “The old Aviva policy would have had a small cancellation fee, and the firm would have received around £200 for the LV policy,” Streames explained.
“Their solution to clawback was to set up a new policy in place of the old one - effectively selling over it. If every third year in a four-year clawback period you change the policy to a new one, you can be a profitable business but it’s unethical.”
Streames said such a model flies in the face of good practice and treating customers fairly.
‘It protects us against other advisers’
One IFA, who does not wish to be named, made the point that sometimes having a cancellation fee policy in place can actually protect an adviser in a scenario where they might do all their due diligence and then find another adviser undercuts them.
“I put one into our agreement and my compliance team says that’s ok,” he explained.
“The scenario I’m protecting myself against is when a client might, for example, come across a friend, speak to their adviser who looks at what they already have and rebrokes - i.e. churns the original policy - to bring their premiums down.
“The first guy, who has done all the work, gets clawback, while the second guy gets the commission. It’s one call versus 20-30 hours you’ve spent - that’s a big hit for advisers.”
He said this is why some firms which do give comprehensive advice have a cancellation policy in place.
“It’s only fair that we’re able to claim back the cost of administration if we’ve done all the work. Obviously you should have flexibility there - for example, if there’s a change of circumstance beyond a client’s control, you don’t charge them.”
This adviser said he has yet to enforce this fee. He said he is clear and upfront with clients that this fee is in place before they take out a policy on his advice.
Compliance stance
Director of protection at Paradigm, Mike Allison, told FTAdviser that technically, a firm can charge a cancellation fee on a protection product.
However, he said there are two main concerns held by him and his compliance colleagues on this. One is whether it would be enforceable in a claims court if the premium was no longer affordable or client circumstances changed.
And two is the reputational risk for the firm if they are seen to be chasing clients who cannot afford premiums to get commission back.
“If the client went to the Financial Ombudsman Service, our experience is that they would rule in favour of the client and that could potentially put the firm on the radar for the FCA. “Under Treat Customers Fairly, our thoughts are that both the above wouldn’t sit well with the FCA,” said Allison.
ruby.hinchliffe@ft.com
