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.
Hearing 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.