The FSA is drawing up its plans to implement the European Insurance Mediation Directive (IMD). All insurance plans (except extended warranties and travel insurance) will become regulated from the second half of 2004.
This means that it is likely that long term care, private medical insurance, critical illness, income protection and life cover will all be subject to stricter regulation. But what form should this regulation take? As we await the imminent publication of the FSA’s consultation document, we asked two industry experts to give their views. The ‘one size fits all’ view is that of an investment industry expert, who wishes to remain nameless. While the ‘proportionality’ view comes from Nick Kirwan, head of marketing and product development at Scottish Provident.
We should avoid the temptation to simply apply the regulatory framework that already exists for investment products to all protection plans. While this may be initially simpler, it may not be in the best interests of consumers or intermediaries. Regulation costs time and money, which in turn pushes up the cost of advice, and makes essential protection less accessible.
The right approach would be to make the regulations proportionate to the risk. Let’s look at two protection products at opposite ends of the risk spectrum – long term care and term assurance.
Long term care is a complex product that is additionally surrounded by complex issues such as the state benefits and the varying services provided by local authorities. Add to this complexity the fact that the product is relatively expensive and the arrangements may involve or affect other members of the family, and also that most customers will be retired. Dealing with retired customers carries additional responsibility as, without any future earnings potential, the ability to recover from financial decisions that go wrong is significantly reduced.
Compare this to taking out life cover. The product is extremely simple – surely everyone can understand how it works. Furthermore, the cover is cheap and involves negligible risk – it does exactly what it says on the tin. The typical customer is relatively young (often taking out a mortgage) with a long period of earning potential ahead of them and almost always needs the cover.
Surely the logical step is to introduce “proportionality” into the regulation by having a lighter touch on low-risk, low-cost, simple products that almost everyone needs, to allow these to be available to the mass market economically and without hassle. Equally, we should expect to see much greater consumer protection for complex products that carry risks, especially where the main buyers could be more vulnerable.
If we simply apply the same regulations to all products, the inevitable result will be that the regulations will be inadequate for some products and their customers and/or overkill for others, making those simpler, low-risk products that almost everyone needs less affordable and harder to buy. The main loser would surely be the consumer.
Nick Kirwan, head of marketing and product development at Scottish Provident
One size fits all
If the “one size fits all” regulatory framework works for investment products, there is no reason why it cannot work for protection plans.
To make the regulation proportionate to the risk sounds fine in theory. But in practice it would be impossible to administer. It would lead to a complex system of regulation that would inevitably drive up costs for the insurer, the adviser and, consequently, the consumer.
I am not suggesting that the regulatory framework that already exists for investment products should simply be applied to all protection plans. Obviously it would need to be tweaked. But I am suggesting that both industries are quite similar in many respects. For example, investment plans vary considerably with regards to their levels of risk and complexity, as do protection products.
But whether we, in the investment industry, are advising on a relatively simple product, such as an individual savings account (ISA), or a complex plan, such as an investment trust, we have to follow the same regulatory and compliance procedures.
Although it could be argued that a cash ISA is a simple product and involves negligible risk, it is surprising how many clients misunderstand the structure of the product and its appropriateness to their needs.
It is therefore important to conduct a full fact-find in all cases. As well as helping the adviser and client to ascertain whether a particular product is suitable, it often reveals other protection or investment gaps that a client may not have previously considered.
Likewise, in the health insurance arena the client deserves the same levels of consumer protection whether he/she is buying a simple life cover policy or a more complex long term care plan.
It is important to bear in mind that a client’s perception of risk varies from one individual to another. It would be wrong for the regulator to force its own perception of risk onto others by tailoring the level of regulation to suit its own singular views.
Also, if “proportionality” were to be introduced into the regulation of health insurance products, this would inevitably lead to different tiers of adviser and, consequently, extra confusion for the consumer. But that is a whole other issue.