Advisers are calling for pure protection business, income protection, critical illness and term insurance to be ringfenced from the outcome of the FSA’s retail distribution review.
The sector is not under the remit of the RDR but industry experts claim it is naive to believe it will remain unaffected by the review.
Lifesearch head of protection strategy Kevin Carr says the FSA’s proposals to restrict the independent tag to fee-based advisers should not be stretched to protection because commission does not result in product bias or consumer detriment in this sector.
He says: “Pure protection should be ringfenced. The FSA’s two areas of concern do not apply to protection. With protection, there is no investment growth so there is no consumer detriment and there is no product bias because commission is the same across all products as it is driven by the premium.”
Direct Life and Pensions marketing manager Richard Verdin also believes protection should not be brought under the RDR.
He says: “Protection does not suffer from the same problems. I do not think the commission is as opaque as they are for other sectors so I do not see the need for requiring intermediaries to be remunerated in ways other than commission.”
Commission levels in the protection sector are generally a percentage of the annual premium, whether for income protection, critical-illness cover or term insurance, and Verdin claims, for this reason, they do not encourage product bias.
But independent compliance consultant Adam Samuel says product bias can and does exist in protection.
He says: “Even if PHI and critical illness offer identical commission per premium, you can attach far more bells and whistles to a critical-illness contract in practice, which slides up the premium and the commission.”
CWC Research director Clive Waller says the RDR’s proposals to introduce three levels of adviser – professional financial planner, general and primary, would push the majority of the population into the hands of the banks when it comes to protection.
He says: “The general category is as good as gone, so the top 5-10 per cent of the population would get good, professional advice and the rest of us would get non-optimal products from a limited range with no charge cap and less suitability.”
Verdin is confident that the RDR will not extend to protection business. He says the FSA recognises that commission is the most efficient method of remunerating protection advisers.
But Carr is less confident and Samuel predicts protection is in the RDR’s sights.
Samuel says: “Failing to extend the RDR to protection and mortgages will mean that we have three different definitions of independent which will not help consumers to understand what they are buying.”
Association of British Insurers head of protection Nick Kirwan says it is “certainly conceivable” that the RDR’s remit will stretch to other areas including protection.
He believes factory-gate pricing could work in the sector if advisers explain it clearly to their clients.
But Carr disagrees. He says factory-gate pricing is flawed in protection because it would allow the big banks, that manufacture and sell their own protection products and therefore do not have to disclose commission, to get a leg up on independent advisers.
He says: “Factory-gate pricing is even less transparent than the current system because banks will be able to hide anything in the price while advisers will have to disclose, for example, that the product is £15 and the extra £5 is for their costs. This will drive consumers away from independent advisers.”
Protection is one of the most commission-dependent sectors in the financial services industry and industry experts agree that consumers will not pay fees for protection products, with many claiming that the introduction of fees would kill the market.
Kirwan says: “I do not believe that people will pay a fee for arranging insurance. It is not culturally the way we do things. If a consumer can get a product for £12 somewhere that is £8 with an adviser, but they have to pay a £400 fee to get it they will not go to the adviser.”
He adds that the current ability to spread the cost over the term of the contract and the tax efficiency created by having no VAT is welcomed by consumers.
Carr considers that people in poor health will be even more reluctant to pay fees for protection because their poor health will increase the time they spend with the adviser and his or her workload, essentially slowing down the process of getting cover, resulting in higher fees.
He says: “If a client has poor health, the adviser’s workload increases. Do we charge a higher fee for someone who is unhealthy or for someone with health problems in their family?”
Carr believes this could result in a treating customers fairly breach.
He says: “At what point does this become discrimination? Commission works in this situation because if the premium is loaded, then the commission goes up and the adviser is paid for the extra work.”
Kirwan agrees that com-mission works and says commission, rather than causing consumer detriment, encourages advisers in the protection sector to treat customers fairly.
He says: “If the client pays a fee up front, it is all done but if they decide later they do not like it, it is too bad and getting that fee back would be difficult. Clawback is a consumer protection. It means that advisers have a vested interest to make sure their client is happy with the product for a long period of time. There is motivation to make sure the advice is good, the client is happy, and the business is not going to go somewhere else. Moving to fees would throw that out the window.”
Waller says if commission is not maintained at attractive levels, the protection gap, which stands at £2.3trn, according to Swiss Re, will increase dramatically.