05 SPRING PROTECT NEWSLETTER Continued on next page... FCA Market Study Because this is such an important area, I make no apologies for outlining some of the key output from the FCA in to the Market Study carried out in the past 18 months or so. I have also added some practical tips to help ensure complicity with the FCA comments. The study provides the clearest signal yet of how the Regulator expects the Protection market, for both advisers and distributors, to evolve. Although the FCA confirmed that protection distribution works well in many respects, it has highlighted areas of concern, mostly around value, commission incentives and the ‘protection gap’. The FCA stressed that while existing policyholders usually receive good outcomes, evidenced by high claims acceptance and low complaints, 58% of UK consumers hold no protection and 59% of these have never considered their protection needs. This is what the FCA calls the ‘protection gap’. The Regulator sees advisers as central to closing this gap, especially as protection is typically sold, not bought and engagement is often triggered by life events such as the purchase of a home, the birth of a child, divorce or illness. It noted that over 80% of sales were carried out via intermediaries and the inference therein is it is they who can help bridge that gap. It is logical therefore that mortgage advisers should expect increased regulatory scrutiny on protection discussions when providing mortgage advice, and engaging with customers on a regular basis to ascertain if lifestyle events have warranted a change in protection needs. Investment and mortgage firms will need to demonstrate a robust approach to identifying unmet protection needs and documenting the reasons behind advice not being taken. As mentioned above, the FCA’s findings show that intermediaries account for 80% of protection sales and remain essential to consumer decision making. However, the FCA is concerned about: • Commission structures that may incentivise unnecessary switching or rebroking, potentially at the expense of consumer value; • Increasing commission rates, despite broadly stable commission revenues; and • The potential for restricted panels to impede competition or deter new entrants. The FCA has not proposed commission caps or bans at this stage but expects enhanced monitoring and strong governance to prevent poor incentives. With these in mind, we believe that firms should look to: • Ensure commission structures and panel arrangements demonstrably do not compromise fair value or consumer choice - effectively not operating through restricted panels.
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