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High cost of non-advised PTA

I wonder if a team of Trea-sury officials decided that what was needed to stop the march of non-advice in protection sales was a second complete regulatory revolu-tion in two years? Or did this all happen without them thinking it through at all?

The massive new change they expect those of us that speak to customers to cope with in our stride is the re-creation of pension term assurance on April 6, 2006. It could be a machiavellian masterstroke but the reason I think it is no more than an unintended consequence of ill thought out bill drafting is that it will cost the Treasury an estimated 250m a year, most of which will go to subsidise the life policies of higher-rate taxpayers. Did the Chancellor really decide that this completely unlobbied-for cause was one to support? It does not do much to redistribute wealth.

Of course, tax relief could encourage more people to buy more protection and close the life cover gap and by adding another choice into the buying process, it could favour the adviser over the supermarket (and thus protect the Treasury from angry widows and orphans). I say could because I do not think it will achieve either.

What it will do, first, is cause a huge rebroking exercise. A very high proportion of all the policies written in recent years will best be rewritten to secure the tax break at awesome cost to the industry and indeed to the wider taxpayer. Huge new business figures will yield the same-sized lapse rate. This will sink some providers and many distributors because their will be no new money coming in, just a vast churn.

As PTA falls under full regulation (COB rules is the jargon), not the insurance specialist version (ICOB), businesses such as mine will have to become fully regulated because one cannot be a protection adviser and not sell the state-subsidised version of it.

But before the fully regulated leap for joy at this new bedfellow delivered to them by the Treasury, we need to remember that those who give no advice will be able to sell PTA with no regulatory costs to speak of. So they will be able to charge far, far less for it than any fully regulated adviser ever could.

The FSA is wondering how non-advised sales can best be controlled because they know that almost all policies bought through non-advisers are misbought because non-advisers cannot treat their customers fairly. The FSA is concerned that all its efforts to protect the consumer seem to be driving advisers to multi-tie and salesmen to sell without responsibility.

But the FSA is in a race against time because after April 6, 2006, if nothing changes, non-advised PTA protection policies will become so cheap compared with advised ones that taking advice will seem impossibly expensive and that will leave millions of consumers buying the wrong policy because it is cheap.

Either that or the FSA needs to accept that you cannot treat customers fairly if you sell protection without advice unless the customer has passed CF3. Or they could deem PTA an ICOB product and tell non-advisers to start taking responsibility for what they sell. I wonder which route they will take?


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