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Compliance tip: Commission disclosure for pure protection contracts

We have seen confusion around commission disclosure on pure protection contracts (e.g. term assurance), partially due to interpretation of existing rules under the Insurance Conduct of Business Sourcebook.

The new Insurance Distribution Directive introduces updated disclosure requirements from February 2018, which should hopefully simplify matters.

Currently, commission on pure protection contracts only needs to be disclosed to a commercial client if the client requests it. Bizarrely, there is no such obligation to disclose commission to a retail client.

However, where a pure protection contract is arranged alongside a retail investment product (as is often the case), this triggers specific disclosure considerations, such as how any commission interacts with any agreed adviser charges for investment advice.

The above assumes advisers follow ICOBS for pure protection business. In fact, firms can elect to follow ICOBS or Conduct of Business. Investment advisers are subject to COBS for investment business, so it is no surprise many also use COBS for their pure protection business and avoid the need for two sets of advice procedures. COBS requires disclosure of all advice fees and commissions.

So where does this leave us? While we await details of the final rules, the new requirements introduced by the IDD are likely to be more closely aligned to requirements for investment business (which are being updated under Mifid II) and should therefore remove any inconsistencies and confusion.

Russell Facer is compliance director at Threesixty

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