If you look at the introduction sections 1.3 to 1.6, it is clear that this market study links to the wider work on the consumer duty. Within this market they know the main distribution channel is via intermediaries, accepting that it can be a cost-effective way for an insurer to reach consumers, and that intermediaries can provide expertise and access to the market.
This study is seeking to understand whether the market is functioning well and whether consumers are receiving good outcomes.
Search for evidence
The FCA will be looking for consistent evidence as to “where markets work well in the interests of consumers, where consumers are able to buy products and services which meet their needs and provide fair value, sold to consumers in a way that is clear, fair and not misleading.”
This will require insurers and distributors to evidence the fair value requirements under the consumer duty and Prod 4 rules in respect of each part of the distribution chain for protection sales.
The FCA has been very specific in chapter three about where the pure protection market may not be functioning well and competition not working effectively in the interests of consumers. It has concerns that:
- The design of commission arrangements may not always support delivery of fair value.
- Some pure protection products may not provide fair value to customers.
- Competitive pressures may be weakening due to the recent exit of several insurers.
Clarity of the sales process and its remuneration is part of a healthy market where consumers can buy products and services that meet their needs and provide fair value.
The FCA will have to get a broad understanding of the different commission models, how they operate in restricted and open panels, and the extent of premium increases to create loaded premiums to generate additional commission.
It may want to assess the amount of commission in the high-net-worth and business protection areas with regards to decency levels for some distributors specialising in this market. At a business level, some smaller cases do not cover their costs, while slightly larger ones will contribute higher levels of profit.
In this context it is worth looking at the overall margin generated in a business rather than costs at case level. When assessing consumer ownership of products throughout their lifetime, an understanding of how policies are reviewed, and the extent to which they are changed will have an impact on adviser remuneration.
Consumer awareness of advice
Demonstrating that the customer is aware of the advice (or non-advised) regime the intermediary is operating in, and the level of post-sale security is important.
The market currently supports many diverse operating models, but the majority of protection sales are linked to indemnity commission payments – an upfront payment that reflects the fact that the majority of the costs are in the client acquisition, research and advice, underwriting and policy issue phase of any contract.
