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Listen and learn

The FSA has clearly moved on. Its interim RDR report notes that “the market called for a simpler marketplace and a clear separation between advice and sales”.

Actually, Tom said: “The RDR should go back to basics and focus on getting a clear gap in consumers’ and retailers’ minds between what is advice and what is just selling without regard to suitability.” The irony in the RDR is that it is the regulator’s failure to police that one line between advice and selling with information and thus ensure that regulated advice is seen as being different and valuable.

Now the FSA notes: “We have been listening very carefully to the feedback provided over the last few months and today’s report shows how we are likely to respond to that. Respondents told us to keep things simple, have a clear distinction between advice and sales, ensure alignment with the potential Money Guidance service and pursue our aims of raising professional standards.”

As it seems inevitable that the RDR will eventually include protection, I cautiously welcome this new approach as long as the FSA continues to understand that the majority of consumers will not want to pay fees for these types of products, especially those in debt.

In a straightforward situation where the deal that the customer receives is in the premium and the product and nothing else, commission is not a bad methodology of remunerating work done. The two traditional areas where it is thought to cause consumer detriment, namely impact on fund growth and product bias, simply do not apply.

There is no fund growth to eat into and as the commission calculation for products such as life cover, critical-illness cover and income protection are the same, any product bias in protection is not driven by commission. As long as the customer gets the right product at the best price, there are no other issues to consider.

Fees on the other hand can cause churn and could even be potentially discriminatory. In protection, clients need “wysiwyg” products (what you see is what you get) and proper rebroking should be best practice but fees could incentivise this, no matter the predictable end result, and end up costing a client far more overall.

The advice process for protection often involves a significant amount of up-front underwriting, which can vary greatly from client to client and an older client who has underwriting issues, such as diabetes and family history, would follow a very different process, receive different advice and take significantly more hours of work to arrange cover than a healthy client. How could a fee treat this customer fairly?

If a client with health issues is set to pay more fees (as well as higher premiums) than someone who is healthy, we could create a market where more consumers were stuck without any protection or with an unsuitable product, just because they could not afford the fees.

As with the Icob rules, the FSA has listened and learned and, at least for now and subject to the above caveat, it should be praised.

Kevin Carr is head of protection strategy at Lifesearch

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