My late father’s favourite quote when I was young was: “All that is needed for evil to triumph is that good men do nothing”. I grew up in apartheid South Africa, so the evil he was talking about was vast and hideous but Edmund Burke’s words also apply to relatively trivial evils, like those that pervade financial services distribution. Though they lack blood and infamy, they nonetheless hurt hugely the consumers who buy the wrong products, or the right products wrongly.
The RDR is tackling much of this but perhaps as a result (one which the FSA feared from outset in truth) the Icobs market is seeing a surge in dodgy distribution, particularly in the bit of the market I may know more about than most – that of advising clients and arranging protection policies over the phone.
Long-term readers of this column will recall that for many years I railed against the abusive practices of some phone-based non-advisers. But since the largest and worst behaving of those went out of business last year due to chronic lapse rates, leaving the insurers more than £10m out of pocket collectively and with a non-disclosure problem they have yet to fathom, we have seen several others shut, scale back or convert to giving regulated advice. Having been so badly stung, the insurers have been a lot slower to pay indemnity commission to those starting up lead-buying non-advised selling models. They are rightly telling them to give
You would think that is a great result for the consumer but the providers’ new vigilance has simply caused the dodgy distributors to change their game. They have realised that in protection it takes years for lies to be found out, so it is as easy to profit from being regulated advisers, but still telling the same old lies, as it was to be non-advisers.
For example, our conversations with consumers reveal there is a trade in the details of those who have bought policies from failed distributors. These poor souls then have their policies churned, perhaps by being told that terminal-illness benefit is the same as critical-illness benefit, but cheaper, or that an existing policy does not include terminal-illness benefit, when of course it does. Given that the unscrupulous adviser has all the data on the original sale, they apparently sound very credible. Another seemingly routine malpractice is to simply fail to submit properly disclosed medical conditions to achieve sales where other-wise they would be lost in underwriting.
Unless this foul trend is checked, we can look forward only to tougher regulation, loss of consumer trust and a consequent reduction in the protection consumers badly need. Happily, unlike many problems of this ilk, the practitioners who can stop the rot are easy to identify. The “good men” we need to do something are the business development directors of our insurers and reinsurers. All they need to do is properly scrutinise and audit the sales methods of those they allow indemnity commission. In addition, their underwriting colleagues need to dramatically improve their non-disclosure auditing fast. That will end abuse and let the regulator leave protection lightly regulated.
All aspects of the protection market are undermined by the wash of dodgy pop-up distributors coming in and then disappearing after three years when their clawback gets out of control. In a consolidated market will the insurers and their reinsurers click the inevitability of future loss faster than they did last time? We will see.
Tom Baigrie is chief executive at Lifesearch