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Critical point

A month on from Prudential&#39s critical illness debacle and IFAs are still fuming. When the Pru gave IFAs a day&#39s notice that it would retrospectively raise critical-illness premiums by around 50 per cent, affecting some 50,000 applications, the industry was in an uproar, claiming the firm had irrevocably damaged its reputation and compromised IFAs&#39 relationships with their clients.

In an attempt to rectify the situation, the Pru issued IFAs a compensation deal of £75 per client application. Even among big IFAs, it has been met with a mixed reception. Despite admitting that Prudential&#39s offer is generous, some IFAs are worried that the company is rushing into the solution in the same way it did with the original premium increase.

Towry Law product research manager Simon Farrant says: “I am surprised that the Pru budged an inch. It has taken such a loss on this already and, even though this move is clearly aimed at subduing its detractors, it only affirms that the company was in the wrong.”

Misys managing director Steve Pearson says the network&#39s members were unhappy at how they had been treated by the Pru and that Misys had negotiated the £75 deal as compensation for admin, a deal worth an estimated £570,000 if all network members took it up. Similar offers have been made to other big IFAs and networks.

But Misys member Life Policies Direct director Jason King is not convinced about the Pru&#39s move.

He says: “I have yet to make a decision whether or not we should take this offer. It is possible that the Pru is rushing into this with the same lack of sense they illustrated with the original decision.”

King says he has spent the last three weeks dealing with lost business and that, while the £75 per case is generous, it will do nothing to repair the long-term damage between IFAs and their clients.

Even with the Pru dipping into its reserves to compensate IFAs, many feel it has not redeemed itself. Apart from a token free 30 days&#39 life cover, now extended for another 30 days on application, the company has been short on relief for consumers. The Pru&#39s inability to understand its customers is one of the key complaints that IFAs still have.

Farrant&#39s is concerned that the action is a symptom of a deeper problem at the Pru. He believes the Pru knew about the critical-illness problem for months and it could have curbed its loss and withdrawn from the market in a more responsible manner.

He says: “When the product was originally developed, the Pru deliberately planned it as a loss-leader, thinking it would make money on add-ons such as redundancy cover and accident insurance. But the company failed to take into account that IFAs would use common sense and pick and choose these items based on cost. They obviously did not believe that IFAs could do their job.

“We were not really affected by the quick withdrawal of the product. What I am worried about is that this demonstrates poor design and release of products at the Pru. It shows a worrying lack of management. There must have been enormous financial implications to make them turn round so quickly.”

Lifesearch director Kevin Carr believes one of the lessons is that marketing departments and actuaries should have acted sooner so that clients and IFAs were not left high and dry.

He points out that most other product providers avoided problems by revising definitions and increased the cost of their guaranteed rates by the last quarter of last year or early this year.

He says: “These providers made their changes in a more steady and disciplined way. They realised the risks inherent and made responsible decisions.”

He says Pru&#39s image will be damaged. “The branding implications will be wide-reaching, both within the industry and with consumers. You are not going to damage your reputation so badly on a whim. The fact that Prudential was willing to do this is, in itself, loud affirmation that this was a very serious financial problem,” he says.

Lifesearch has asked law firm Whitman Breed Abbott & Morgan to look into a class action law suit against the Pru and Carr says it has received vocal support from IFAs.

“We are looking at the impact of the Pru&#39s decision on us and other IFAs and what the level of recompense would need to be. Many IFAs are very interested in joining us in this action. The present compensation offer is a start but I do not think it goes anywhere near far enough,” he says.

The compensation offer is an interesting move for the Pru. Many commentators believe that with a class action suit looming over its head and doubtless trips to the ombudsman on the cards, it may have been smarter for the Pru to try to weather the storm.

Many believe more ammunition has been provided for the Pru&#39s detractors. Carr says: “It needs to be careful what it does and says but it would be hard to imagine what it could possibly do next to harm itself further. Proving that what it has done is against the norms of the industry will not be that difficult.”

Farrant says: “If they wanted to, IFAs could boycott the Pru quite easily. Investment bonds are its key product line and they would be easy for IFAs to abandon. After this, the Pru has given IFAs a credible basis to remove them from their product links.”

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