In today’s RDR paper, the FSA said it will not introduce adviser charging into protection but will require firms to disclose any commission payment where pure protection is sold at the same time as investment advice.
The regulator said remuneration changes would not help it tackle the issues it identified in the protection market in its previous RDR paper, including the risk of a disproportionate number of investment advisers tapping into protection for upfront commission payments.
The paper said in relation to adviser charging, respondents voiced strong concerns about the impact this might have on consumers’ willingness to seek advice on pure protection products, since these products are sold and not bought.
It said: “While we do not believe there is a case for regulatory intervention to change radically the way advisers are remunerated for pure protection advice, our analysis did identify another source of risk – relating to remuneration transparency – if we do not apply adviser charging to pure protection sales.
“We believe that there is, therefore, a case for requiring commission disclosure where pure protection is sold under Icobs alongside investments. There is currently no requirement for advisers to do this because our view has been that the customer is most interested in the amount of premium they must pay, rather than the amount that their adviser receives. However, with the changes proposed for the way advisers can charge for investment advice, we think we need a new requirement for transparency where pure protection is sold at the same time as investment advice.
“This would make it clearer to the customer what is included in the investment fee and how the adviser is remunerated for the pure protection element of their advice.”
However, advisers electing to operate under Cobs will be required to apply all the new Cobs rules to their pure protection advice, including those on adviser charging.
The FSA is now developing proposals on commission disclosure for the sale of pure protection sold under Icobs alongside investments and intend to consult at the end of March 2010 on draft rules.
In November Money Marketing revealed that commission is to stay for protection business post-RDR.
Following a meeting with the Association of British Insurers and a number of associated working groups, the regulator was understood to have told the meeting that it struggled to see how advisers could have product bias when selling protection and therefore commission is likely to stay under insurance conduct of business rules.
Professional requirements for advisers who sell protection remains unchanged after the FSA asked respondents whether an unwillingness to invest in further professional development could affect standards and ultimately lead to poor consumer outcomes.
Today’s paper said: “Very few respondents thought that this risk was significant and we have not been able to identify new drivers for poor quality advice that might arise in these circumstances.
“In any event, it seems unlikely that there is a large potential market for such specialist advice. In terms of the requirements on retail investment advisers to take exams in pure protection, there is currently a requirement that they pass a module at level 3, and this will continue to be the case under the new arrangements.”
The FSA is also applying advice labeling to the protection market. It says there is a case for consistent labeling across all distribution channels for pure protection advice.
An independent adviser should be required to consider the full range of possible ways of meeting a customer’s protection needs. Advisers could choose to limit their advice to one type of pure protection product, but they would have to label this advice as restricted.
The FSA also said to avoid consumer detriment going forward it will also monitor closely the growth of internet-based sales of term assurance policies and hybrid products.